David Ward is a partner in Cassels Brock’s restructuring and insolvency group, and commercial litigation groups. David has a litigation emphasis to his insolvency practice, with a particular focus on creditors’ rights and remedies in reorganisations and liquidations under Canada’s major insolvency and corporate statutes. Building on his extensive commercial litigation background, David has significant experience advising a wide range of lenders and creditors on all aspects of commercial reorganisations in Canada.
Larry Ellis is a key member and partner in the firm’s restructuring and insolvency group. He has extensive experience in both the litigation and commercial aspects of corporate restructurings, bankruptcies, receiverships, workouts and enforcement of creditors’ rights and remedies. He represents a number of different parties, including purchasers, secured and unsecured creditors, receivers, debtors, monitors, trustees and lending syndicates.
Ben Goodis is an associate in the Cassels Brock’s restructuring and insolvency group and financial services group. Ben’s practice focuses primarily on domestic and cross-border commercial reorganisations, including proceedings under the Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act, as well as informal restructuring proceedings. He has gained experience in both the corporate and commercial and litigation aspects of restructuring and insolvency.
GTDT: In the last year, have you seen any developments or trends in the nature and volume of insolvency filings?
David Ward, Larry Ellis and Ben Goodis: According to statistics compiled by the Office of the Superintendant of Bankruptcy, the third quarter of 2018 saw the most significant year-to-year increase in business insolvencies for several years, with a 4.6 per cent growth in insolvency filings in Q3 2018 over Q3 2017. One potential explanation for this trend is that interest rates have risen steadily since the middle of 2017, putting pressure on businesses who had previously struggled to meet their obligations as they came due. The sectors most impacted were retail, construction, manufacturing and transportation.
Although the total number of large insolvency filings under the Companies’ Creditors Arrangement Act (CCAA) is down year over year, with only 17 filings to date in 2018, the retail sector continues to see many prominent insolvency filings as brick-and-mortar stores struggle amid shifting consumer preferences and growing competition from online channels. The supply requirements of physical stores outweigh consumer demand, putting additional pressure on industry profit margins.
There is potential for the insolvency rate in the Canadian province of Alberta to see a jump, as the drop in oil prices has in the past resulted in the failure of oil and gas extracting companies and companies servicing the sector. More generally, depressed commodity prices continue to stress Canada’s once booming mining and resource sectors.
Finally, as the Canadian cannabis market rapidly develops following the October 2018 legalisation of recreational cannabis, observers are predicting that cannabis-related insolvency filings will begin to emerge in 2019, as certain cannabis companies and cannabis industry suppliers will face challenges in a dynamic marketplace.
GTDT: Describe the one or two most notable insolvency filings in your jurisdiction in the past year.
DW, LE & BG: In June 2017, iconic retailer Sears Canada entered bankruptcy protection, closing 20 of its 94 large department stores and laying off close to 3,000 of its 17,000 employees. The company’s efforts to reinvent itself were short-lived, with the announcement coming just a few months later that the remaining stores would also be closed and the entire work force laid off. The filing marked an end to the company’s 65-year retail history in Canada, beginning in the early 1950s.
Although the Sears Canada inventory liquidation was completed in late 2017, the wind-down will continue into 2019, when it is anticipated that the court-appointed monitor and litigation trustee may commence litigation claims, including claims in respect of reviewable pre-insolvency transactions. Further, pension and benefits priority issues relating to thousands of former employees of Sears Canada are yet to be resolved. Priority issues arising regarding the wind-up of an underfunded employee pension plan will likely prove particularly controversial with significant media attention focused on how long-time employees fare in the shut down. Canadian law with respect to the priority accorded to pension deficits in insolvency proceedings is still very much in development and the Sears Canada case will be interesting to follow for this reason as well.
In September 2017 Toys “R” Us initiated bankruptcy proceedings in Ontario one day after filing for creditor protection in the United States. The filing was necessitated by the fact that the Canadian company’s working capital depended upon loans tied to the US parent’s credit facility.
As was the case with Sears Canada, the Toys “R” Us filing was front-page news. As the leading toy and baby products retailer in Canada, Toys “R” Us operates 82 retail stores and employs close to 3,800 active employees.
Unlike Sears Canada, in the Toys “R” Us proceeding, the United States parent found a purchaser for the Canadian Toys “R” Us entity, which had continued to remain profitable, and entered into a transaction to sell 100 per cent of the equity of Toys “R” Us (Canada) Ltd, a transaction which closed on 31 May 2018. Upon the completion of the transaction, the Ontario court granted an order terminating the case.
In January 2018, Carillion Canada Holdings Inc, Carillion Canada Inc and several affiliates commenced a CCAA proceeding in the Ontario Superior Court of Justice (Commercial List). Several other Carillion entities have since joined as applicants in the proceeding. The CCAA filing came only days after Carillion’s ultimate parent, Carillion plc, a UK entity, commenced a liquidation proceeding in the United Kingdom.
Prior to the CCAA filing, the Carillion group carried on several business operations in Canada, including business support services in the oil and gas, healthcare and aviation sectors, road maintenance services in the Canadian provinces Ontario and Alberta, sustainable energy distribution and transmission services, and construction services. Since the filing, many of its business lines have been sold to third parties, while further disposals of assets, including real property assets, are anticipated.
The Carillion group has implemented a post-filing claims process, soliciting certain claims against the CCAA applicants and their directors and officers. Over C$1.5 billion in claims, including contingent claims, have been filed. The CCAA proceeding is expected to continue for several months into 2019, as the applicants and CCAA monitor continue to assess claims and proceed with plans to create additional value for creditors.
“Although the Sears Canada inventory liquidation was completed in late 2017, the wind-down will continue into 2019, when it is anticipated that the court-appointed monitor and litigation trustee may commence litigation claims.”
GTDT: Have there been any recent legislative reforms? Is there a perceived need for reform?
DW, LE & BG: On 29 October 2018, the Canadian government introduced Bill C-86, proposing changes to the federal Bankruptcy and Insolvency Act (BIA) and CCAA to preserve the usage rights of licensees of intellectual property in all proceedings under such statutes. Bill C-86 amends the BIA provisions that apply in bankruptcies and receiverships to harmonise the protections given to third-party users of intellectual property with the protections afforded to such persons in BIA proposals and CCAA proceedings. Further, Bill C-86 amends the BIA and adds a new provision to the CCAA to ensure that transferees of intellectual property subject to a pre-existing licence will acquire the intellectual property subject to the usage rights of the licensee. Bill C-86 was signed into law on 13 December 2018 and is now binding law.
As indicated, issues relating to under-funded employee pension plans generate a high level of media attention. Politicians have promised to legislate some measure of additional priority for unfunded pension deficits, but such measures are controversial with other interest groups, and it remains to be seen if any changes will be made in this area. The federal government is currently engaged in national consultations with various stakeholder groups to determine what changes, if any, may be recommended to pension regulations and insolvency laws in order to enhance retirement security.
GTDT: In the international insolvency field, have there been any legislative or case law developments in terms of coordination of cross-border cases? What jurisdictions are you most likely to have contact with?
DW, LE & BG: There has been a very interesting cross-border case law development involving Canada and the Isle of Man. The matter involved the determination of a debtor’s centre of main interest (COMI).
Banners Broker International Limited (BBIL) is an Isle of Man corporation that operated an online enterprise whereby registered members could advertise their business on the ‘Banners Broker’ network of websites while, at the same time, earn revenue as an advertising publisher through websites designed and hosted by Banners Broker associated companies. BBIL was central to a corporate network of entities and operations around the world that operated under the trade name Banners Broker.
In February 2014, winding up proceedings in respect of BBIL were commenced in the Isle of Man (Isle of Man Proceeding) and joint liquidators of BBIL were appointed (Joint Liquidators) by the High Court of Justice of the Isle of Man (Manx Court).
In the months following their appointment, the Joint Liquidators determined that BBIL had significant connections to Canada and that it would be necessary to commence restructuring proceedings in Toronto. Accordingly in August 2014, upon the application of the Joint Liquidators, the Ontario Superior Court of Justice (Commercial List) (Canadian Court) granted an order recognising the Isle of Man Proceeding as a ‘foreign main proceeding’ and appointed the Joint Liquidators ‘foreign representatives’ for the purposes of Part XIII of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (Canadian Proceeding).
In connection with the recognition proceedings, a receiver was also appointed over BBIL’s assets in Canada (Receiver).
An important ground for the Canadian Proceeding and the appointment of a Canadian receiver was that BBIL appeared to have property in and business connections to Canada, as well as financial dealings that were deserving of investigation.
The Canadian Court granted recognition of the Isle of Man Proceeding as a foreign main proceeding under the COMI test despite the fact that the Isle of Man is not a signatory to the UNCITRAL model law.
However, as the insolvency administration progressed, it became clear that BBIL’s connections to Canada were far more extensive than initially believed. Indeed, BBIL’s connections to Canada vastly outweighed its connections to the Isle of Man, or and any other single jurisdiction.
Given the growing Canadian focus of the proceedings, the court officers concluded that it was no longer economic to administer the insolvency proceedings as a conventional cross-border recognition proceeding. They determined that it would be more economical for BBIL to be wound-up in a single insolvency jurisdiction.
As a result, in May 2016 the court officers brought a motion to stay the Isle of Man Proceeding in favour of the proceedings in Canada and to empower the Receiver to conclude the administration of BBIL in Canada by transitioning the insolvency administration activities from the Joint Liquidators to the Receiver (Transition Motion).
In May 2016, the Canadian Court granted the relief sought by the court officers on the Transition Motion and authorised the transition of the insolvency administration activities from the Joint Liquidators to the Receiver.
Later that year, the Manx Court granted an order directing that the BBIL liquidation proceedings in the Isle of Man be stayed until further Order of the Court. The Manx Court reasoned that while it was initially the view of the Joint Liquidators that COMI was in the Isle of Man, as matters progressed it became apparent that COMI was ‘in reality and substance Canada’. The Manx Court further found that it made ‘a great deal of commercial and practical sense for the Receiver to progress matters in Canada and for the Joint Liquidators in the Isle of Man to stand down’.
Although unique, the BBIL insolvency proceedings are an important reminder that insolvency professionals may choose to reassess an initial COMI determination where new facts are uncovered and it is otherwise in stakeholders’ interests to ‘shift’ COMI .
GTDT: In your country, is there a particular court or jurisdiction that sees a higher concentration of insolvency filings? What is the attraction of that forum?
DW, LE & BG: Commercial courts and judges associated with Canada’s major urban centres of Toronto, Vancouver, Montreal and Calgary continue to see the vast majority of all major business insolvency filings. Of these cities, in 2018 major filing activity was busiest in Toronto and Montreal, with Vancouver and Calgary a distant third and fourth place.
Toronto’s specialised Commercial List Court continues to attract many of the largest and most complex big company and corporate group filings. The Toronto court benefits from experienced, dedicated and commercially trained judges, as well as a carefully developed Practice Direction that moves cases along relatively quickly and is flexible enough to adapt to the ‘real time’ pressures brought on by the difficult and heavily litigated insolvency filings.
GTDT: Is it fair to describe your jurisdiction as either ‘debtor-friendly’ or ‘creditor-friendly’ in terms of how insolvency filings proceed?
DW, LE & BG: It is fair to describe our jurisdiction as ‘reorganisation-friendly’. As a general matter, Canadian courts strive to give applicable bankruptcy legislation a liberal interpretation to facilitate the objectives of a restructuring and continue the debtor as a going concern enterprise in the interim. In doing so, judges will occasionally rely on their inherent jurisdiction or alternatively their broad discretion to fill any gaps in the legislation to facilitate corporate rescues.
In cases where it is apparent that a turnaround is not achievable, secured creditors are usually able to efficiently and effectively enforce their rights to realise upon and sell assets in a court supervised and commercially reasonable manner that maximises value for stakeholders.
GTDT: What opportunities exist for businesses wanting to purchase assets out of an insolvency, and how efficient is the process? What are the best ways to take advantage of opportunities in this area?
DW, LE & BG: Court supervised insolvencies generally require that an enforcing secured creditor employ an insolvency representative (ie, receiver or trustee-in-bankruptcy) to realise upon assets. This process will often involve developing and seeking court-approval for a ‘sales process’ that ensures that assets have broad exposure to market and are sold on a commercially reasonable basis. Sales are subject to court approval on motions where insolvency representatives are required to lead evidence to account for the reasonableness and sufficiency of their realisation efforts. The process is even-handed, transparent and court-supervised.
Opportunities to buy assets are generally well publicised on receiver websites and digital media sources. Certain industry newsletters and emailers also describe sales processes and assets at market.
The Inside Track
What two things should a client consider when choosing counsel for a complex insolvency filing in this jurisdiction?
Complex restructurings require law firms with a national presence and sufficient bench strength and expertise to address a broad range of legal issues including insolvency, mergers and acquisitions, labour and employment, pensions and occasionally construction law and securities.
What are the most important factors for a client to consider and address to successfully implement a complex insolvency filing in your jurisdiction?
The success of a restructuring is very often a function of having an appropriate management or chief restructuring officer resource in place who can make and explain difficult decisions to stakeholders. Lawyers and financial advisors need to have the trust of management and vice versa so that the collective effort is focused on achieving the best results in the circumstances.
What was the most noteworthy filing that you have worked on recently?
The Banners Broker receivership described above is an interesting and important case in that involves an enterprise with few hard assets and a virtual or online presence that spanned the globe. The fact that close to 150,000 relatively small and unsecured creditors around the world were drawn up into the insolvency also makes the case unique. A combination of law enforcement and insolvency professional efforts stopped the scheme from growing and managed the downfall efficiently.
David Ward, Larry Ellis and Ben Goodis