Canada: 2010 Year In Review: Insolvency Jurisprudence In Ontario

Article by Virginie Gauthier and Evan Cobb ¹

This article was originally published in Commercial Insolvency Reporter, Volume 23, Number 2, December 2010

The past twelve month period has provided a wealth of new insolvency and restructuring jurisprudence in Ontario. From the long awaited implementation of comprehensive amendments to both the Companies' Creditors Arrangement Act ("CCAA") and the Bankruptcy and Insolvency Act ("BIA"), to the ongoing high profile insolvency proceedings of Nortel and Canwest, the Courts of Ontario have had a steady stream of issues to consider.

This paper aims to take the reader on a tour of some of the Courts' most interesting decisions and orders of the past year in the area of insolvency law in Ontario.

SECTION 1 – CROSS-BORDER INSOLVENCY PROCEEDINGS

The amendments to the CCAA and the BIA have added more structure to the cross-border insolvency regime in Canada and brought Canadian legislation in line with the UNCITRAL Model Law on Cross-Border Insolvencies. At least one recent Ontario matter has shown the Court's willingness to utilize the flexibility of these provisions not just to recognize the orders of foreign courts, but also to open the mechanisms of domestic courts and domestic law to aid in the administration of foreign insolvency proceedings.

1.1 Tucker v. Aero Inventory (UK) Ltd., [2010] O.J. No.772 (Ont. S.C.J.) / Tucker v. Aero Inventory (UK) Limited and Aero Inventory PLC (Court File No. 09-CL-845600CL)

In the first proceeding commenced under the newly enacted Part IV of the CCAA on cross-border insolvencies, the Joint Administrators of the U.K. based Aero Inventory (UK) Limited and Aero Inventory plc (collectively, "Aero") applied for recognition of their U.K. administration proceedings in Canada. Aero had substantial assets in Canada.

At the commencement of these proceedings in Ontario, the Court ordered, amongst other things, that the determination and enforcement of any person's rights of set-off from and after the effective time of the recognition order shall be temporarily stayed pending further order of the Court.

The Court's rationale for making this order was a concern that Aero did not have physical control of its inventory in Canada, as the inventory was in warehouses operated by customers who had contracts with Aero and utilized inventory on a self-service basis. The customer contracts contained various damages clauses that created a concern that customers of Aero would utilize Aero's inventory without payment and then attempt to set off the amount payable for such inventory consumption through the assertion of damages under the customer contracts. The joint administrators in the U.K. proceedings (the "Joint Administrators") sought to prevent that outcome.

After reviewing the decision of Farley J. (as he then was) in Re Air Canada (2003), 45 C.B.R. (4th) 13, Mr. Justice Newbould concluded that the Court had jurisdiction pursuant to sections 49(1) and 50 of the CCAA to make any order appropriate in the circumstances, and that a Court has the power to temporarily stay the right of set-off protected in section 21 of the CCAA. The Court also noted that the length of the temporary stay would depend on the circumstances existing at the time.

That particular provision of the Court's order shows the flexibility in Part IV of the CCAA, and especially in section 49 of the CCAA. As stated above, section 49 empowers the Court to make any order that it considers appropriate, if necessary for the protection of the debtor company's property or the interests of a creditor or creditors.

Later on in the proceedings, the Joint Administrators returned to the Ontario Court to seek an order lifting the stay imposed by the recognition order for the purpose of assigning the Aero entities into bankruptcy under Canadian law. The Court found that the purpose of this assignment was to assist the Joint Administrators in taking advantage of Canadian preference provisions for the purpose of maximizing recovery on Aero's assets, which the Court said was consistent with the Joint Administrators' mandate under U.K. law. The Court lifted the stay, granting the Joint Administrators the right to assign Aero into bankruptcy in order for a trustee to challenge certain past transactions under Canadian bankruptcy law². The Court agreed with the Joint Administrators' argument that bankruptcy proceedings and proceedings under Part IV of the CCAA could co-exist and, in fact, that the possibility appeared to be specifically contemplated by section 48(4) of the CCAA which provides that,

Within these Part IV proceedings, KPMG Inc. was also appointed as receiver of the assets, properties and undertakings of Aero's Canadian affiliate, Aero Inventory (Canada) Inc., again pursuant to section 49 of the CCAA as well as section 101 of the Courts of Justice Act (Ontario). Aero Inventory (Canada) Inc. provided certain management services to Aero in connection with Aero's customer contracts. The appointment of a receiver was necessary to ensure that Aero Inventory (Canada) Inc.'s services were still available as needed.

1.2 TLC Vision Corporation (Court File No. 09-8515-00CL)

Unlike the Aero recognition proceedings discussed above that arose as a result of foreign main proceedings constituted by U.K. administration orders, the TLC Vision Corporation recognition proceedings arose as a result of a foreign main proceeding that was commenced under Chapter 11 of the United States Bankruptcy Code. The recognition of a Chapter 11 foreign main proceeding under Part IV of the CCAA created a unique set of complications.

Section 46 of the CCAA allows a "foreign representative" to seek a recognition order in the Canadian courts. However, by definition, a "foreign representative" must first be appointed. In a case where a Chapter 11 proceeding is commenced by an electronic filing, with a delayed subsequent order in which a foreign representative may be appointed by the US Court, a corresponding delay in the commencement of the Canadian recognition proceedings is created. Whereas a Chapter 11 proceeding may have been commenced in the US and publicized thereby triggering an automatic stay, no foreign representative will have yet been appointed by the US Court to bring a motion for foreign recognition and a stay of proceedings in Canada. Needless to say, this lag period creates concerns for a corporate group that has commenced proceedings under Chapter 11 and has substantial assets in Canada as well as Canadian affiliates that may not be under the jurisdiction of the Chapter 11 stay.

TLC Vision Corporation came up with a creative solution to this problem by successfully arguing that section 106 of the Courts of Justice Act (Ontario), section 11 of the CCAA, and the inherent jurisdiction of the Court all provided a basis upon which the Court could grant a temporary stay of proceedings against TLC Vision Corporation. The stay order granted contained provisions substantially similar to the stay provisions found in initial CCAA Orders. The stay order also allowed any party to apply to vary or rescind the order on two days notice. A recognition order under Part IV of the CCAA was then sought and received two days later upon appointment of a foreign representative in the Chapter 11 proceedings.

1.3 Re. Nortel Networks Corp., [2010] O.J. No. 2648 (Ont. C.A.) / Re. Nortel Networks Corp., [2010] O.J. No 1111 (Ont. S.C.J.)

On January 11, 2010, the U.K. Pension Regulator commenced proceedings under its own administrative processes against various Nortel entities, including the Nortel CCAA applicants, by sending a warning notice to Nortel as a preliminary step toward the issuance of a direction against those non-UK entities to provide additional financial support to the underfunded pension plan of Nortel Networks UK Limited. The warning notice asserted various bases for liability against Nortel Networks Limited and Nortel Networks Corporation, two Canadian filed entities who were not plan sponsors, and required them to participate in the UK tribunal proceedings to defend against the claim for financial contribution.

By a motion to the Ontario Superior Court of Justice, the monitor of the Nortel CCAA applicants raised two issues. First, did the delivery of the warning notice violate the stay imposed by the initial CCAA Order? Second, if delivery of the warning notice did violate the stay, would the Ontario Court have jurisdiction to render the warning notice of a U.K. regulatory body null and void in the Canadian CCAA proceeding? On the first point, the Court explained that a proceeding against which the stay in the initial CCAA Order would be imposed included a procedural step that is part of a larger proceeding. The delivery of the warning notice was "a step on the road to crystallizing a contingent claim" and was a proceeding that should be stayed as a result.³

On the second point, the Court explained that the U.K. Pension Regulator sent the warning notices to Canadian Nortel entities in Canada and thus took steps in Canada in respect of a proceeding. The Court believed that it had jurisdiction to declare the warning notice sent by the U.K. Pension Regulator null and void in Canada.⁴

This decision was affirmed by the Court of Appeal.

SECTION 2 – EMPLOYMENT AND PENSION MATTERS

Employment issues are often at the forefront of insolvency proceedings. As will be seen below, these issues often focus on the rights and entitlements of employees terminated as a result of the restructuring process.

2.1 Re. Nortel Networks Corp. (2009), 59 C.B.R. (5th) 23 (Ont. C.A.)

On November 26, 2009, the Ontario Court of Appeal released a decision confirming that a stay of proceedings granted pursuant to section 11 of the CCAA can have the effect of suspending payments to former employees, both unionized and non-unionized. The Court of Appeal agreed with Nortel's argument that termination and severance pay owed to nonunionized employees who were terminated before the commencement of the CCAA proceedings are unsecured pre-filing claims and are subject to the stay of proceedings in the Initial Order.⁵ Further, the Court of Appeal agreed that post-employment benefits to former unionized employees should be similarly treated.

The Court of Appeal found that to the extent that provincial employment legislation requires almost immediate payment of termination and severance payments, that provincial legislation is in conflict with the purpose of the stay provisions in the CCAA. The Court of Appeal emphasized that the purpose of the CCAA is to facilitate the making of a compromise or arrangement between an insolvent debtor company and its creditors, to the end that the company continues its operations. The broad stay provisions of the CCAA are the primary means of achieving the restructuring of an insolvent business. The CCAA stay provisions reveal Parliament's intent to allow the Court to freeze debt obligations owing to all creditors for past services (and goods) in order to permit a company to restructure for the benefit of all stakeholders.⁶

The Court of Appeal held that there is a need to preserve the ability of the CCAA Court to:

The Court of Appeal also noted that there was no reason not to apply the same reasoning in a liquidating restructuring, where the debtor was engaged in going concern sales.⁷

The union also sought to bring its formerly employed members within the scope of the former section 11.3 of the CCAA (now section 11.01), arguing that the post-employment benefits sought were actually compensation for goods or services or other valuable consideration provided in the post-filing period.

However, none of the employees in question continued to provide services to Nortel in the post-filing period.

The union's position was that the compensation applicable to services performed by any unionized employees under the collective agreement in the post-filing period must include all of Nortel's monetary obligations to all of its present and former unionized employees coming due under the collective agreement in the post-filing period. Neither the Superior Court of Justice nor the Court of Appeal were persuaded by this argument, holding that the compensation that the union was seeking was a right which amounted to deferred compensation for prior services, which vested in the pre-filing period.⁸

The former non-unionized employees sought leave to appeal the decision to the Supreme Court of Canada. Leave to appeal was denied, however by that time the former employees agreed to withdraw the motion pursuant to the Settlement Agreement described below.

2.2 Re. Nortel Networks Corp. (2010), 63 C.B.R. (5th) 44 (Ont. S.C.J.) / Re. Nortel Networks Corp., [2010] O.J. No. 1408 (Ont. S.C.J.)

After the commencement of their CCAA proceedings, the Nortel applicants continued the provision of medical and dental benefits and income benefits for disabled employees and contributed current service and special payments to the registered employee plans. These costs were largely discretionary and imposed a significant burden upon the Nortel applicants and could not continue forever, particularly since it became clear that Nortel would not be a longrun going concern and thus any payment to or in respect of former employees for non-priority claims was effectively a dollar lost to other creditors in the distribution process. However, a sudden and drastic termination of all such employee benefits would be undesirable due to the impact that this would have on the various parties with an interest in such benefits.

In January of 2010, Nortel issued cash flow forecasts showing the cessation of medical and dental benefits for retirees and special contributions to registered employee plans as of March 31, 2010. Representative counsel for various employee interests and counsel for the CAW began to discuss an orderly wind-down solution for these benefits with the Nortel CCAA applicants. If no settlement was reached, the Nortel CCAA applicants explained that they would not be required to honour the above benefits and payments and they would cease immediately.

A negotiated settlement was reached (the "Settlement Agreement") providing a structure for (i) the time frame for ending the provision of medical and other benefits to pensioners and disabled employees during 2010, (ii) the time frame for ending income benefits for disabled employees, (iii) the creation of a termination and severance fund for the advance distribution of amounts to eligible individuals, (iv) the withdrawal of the motion for leave to appeal (to the Supreme Court of Canada) with respect to the termination and severance pay issue described above, (v) the distribution of the corpus of the Nortel Health and Welfare Trust, (vi) the transition of the administration of the Nortel CCAA entities registered pension plans, (vii) the continuation for a limited time of contributions to these registered pension plans, (viii) the settlement of certain issues related to the priority of claims that have and will be made in the estate of the Nortel CCAA applicants, and (ix) the release of claims against the trustee of the Nortel Health and Welfare Trust, the administrators of the registered pension plans, the monitor, and affiliates of the Nortel CCAA applicants.

A $57 million charge was also established to secure payment of medical and dental benefits, certain income benefits and the termination and pension amounts to be paid under the Settlement Agreement. Aside from the benefits described above, the Settlement Agreement would also bring Nortel closer to the ultimate goal of certainty in respect of the outstanding claims against it.

Although the terms of settlement had involved consultation with many parties, the motion to approve the Settlement Agreement was opposed by many constituents including the official committee of unsecured creditors of the U.S. Nortel companies, the bondholders' committee and a group of dissident employees on long-term disability. On the one hand, the creditors' and bond-holders' committees felt that certain portions of the Settlement Agreement were too generous to the beneficiaries including one provision in particular. On the other hand, the dissident employees felt that the Settlement Agreement did not provide for sufficient compensation to their group, and among other things, that the extent and scope of the releases was too broad.

The first motion to approve the Settlement Agreement lasted two days, and ultimately, the Court refused to grant such approval. The Court was of the view that it had the jurisdiction to approve a settlement agreement if it was consistent with the spirit and purpose of the CCAA and was fair and reasonable in the circumstances.⁹ The principal reason for the Court's refusal to approve the Settlement Agreement on this first motion was the inclusion of a particular clause of the Settlement Agreement labelled as "Clause H.2", which will be discussed in greater detail below.

The Court was willing to allow the releases contained in the Settlement Agreement despite the inclusion of a release of claims against directors and officers of Nortel and against the trustee of the Nortel Health and Welfare Trust. The Court was satisfied with these releases despite assertions on behalf of certain opposing former and long-term disability employees that the releases negated significant claims for contribution and indemnity in respect of certain funding deficiencies. The Court held, in accordance with prior case law, that the releases were fair and reasonable because they were necessary and connected to the resolution of the claims against the debtor and would benefit creditors generally and were not overly broad or offensive to public policy. Also relevant was the fact that the releases would benefit creditors by reducing the risk of litigation and that the releasing parties received consideration in the form of immediate compensation and the maintenance of their rights to distribution claims. In its analysis, the Court also pointed out that any litigation that was being released would be risky and would take several years to resolve and that many of the claims were unlikely to succeed.¹⁰ This analysis is similar, though not identical, to that outlined by the Ontario Court of Appeal in ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp. (2008), 45 C.B.R. (5th) 163 (Ont. C.A.) ("Metcalfe").

The Court took greater issue with "Clause H.2", which was the source of objection of the unsecured creditors committee and certain noteholders. Essentially, that clause provided that, in the event of a bankruptcy of the Nortel CCAA applicants, if there are amendments to the BIA that change the current relative priorities of the claims against the Nortel CCAA entities, no party is precluded from arguing that such amendment is applicable despite its inconsistency with the terms of the Settlement Agreement. The Court refused to approve the settlement with this Clause H.2 included because it created "the potential for a fundamental alteration of the Settlement Agreement". Put simply, "if the creditors are to be bound by the Settlement Agreement, they are entitled to know, with certainty and finality, the effect of the Settlement Agreement".¹¹

The following day, on that basis, the Court dismissed the original motion. Very shortly after the dismissal, the parties reached an amended and restated agreement removing Clause H.2 The Court approved an amended and restated Settlement Agreement.

SECTION 3 – CCAA EQUITY CLAIM RESTRICTIONS

The CCAA now prescribes a process for dealing with equity claims. Subsection 6(8) states that no compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the Court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid.

The concept seems fairly simple – an equity holder should not obtain any recovery in respect of its equity interest until all creditors are first paid. An "equity claim" is defined broadly to include any claim in respect of an equity interest including, among other things, a monetary loss resulting from the ownership, purchase or sale of an equity interest. An "equity interest" is, subject to certain exceptions, essentially a share of a company or a unit of an income trust, or a warrant, option or other right to acquire such a share or unit.

This concept has been a topic of interest in the two cases outlined below.¹²

3.1 Allen-Vanguard Corporation (Court File No. CV-09-00008502-00CL)

Allen-Vanguard Corporation and various of its affiliates (collectively, "Allen-Vanguard") were the subject of a pre-packaged restructuring plan in December of 2009. Under the plan, the plan sponsor was to provide an injection of capital to reduce the debt owed to the existing secured lenders. The plan sponsor would also assume a portion of the secured lenders' debt on a subordinated basis and would also acquire all of the equity of the restructured Allen-Vanguard. The vast majority of the other creditors of Allen-Vanguard were unaffected, except for a group of contingent creditors discussed below.

In the lead up to the pre-packaged plan, a group of current and former shareholders served a notice of action and statement of claim seeking approximately $80 million in damages from Allen-Vanguard, its officers and directors. The shareholders claimed, among other things, that Allen-Vanguard and its directors and officers had made misrepresentations as to the financial health of the company and were negligent in entering into an earlier acquisition transaction that some believed was a catalyst to the insolvency of Allen-Vanguard.

In some sense, the plaintiffs were no different than any other creditor and should, arguably, not be treated less favourably. However, the plaintiffs' claims were in respect of losses on their shareholdings and, as a result, were "equity claims". Accordingly, these claims had to be entirely compromised as against Allen-Vanguard as all claims that were not equity claims were not being paid in full under the plan.

The plan took full advantage of the Ontario Court of Appeal's decision in Metcalfe and provided for comprehensive releases in favour of the directors, limited only by section 5.1(2)(b) of the CCAA as the plaintiffs' "equity claims" were based on allegations of misrepresentation by directors. However, the sanction order provided further protection to the directors by limiting the plaintiffs' recourse solely to Allen- Vanguard's directors' and officers' insurance. Plaintiffs' counsel did not object to this relief.

3.2 Re. Canwest Global Communications, [2010] O.J. No. 2984 (Ont. S.C.J.) / Re. Canwest Global Communications, [2010] O.J. No. 3233 (Ont. S.C.J.)

The culmination of the CCAA restructuring of Canwest Global Communications Corp. and certain of its affiliates was a transaction with an affiliate of Shaw Communications Inc. ("Shaw"). The transaction provided that Shaw would purchase certain television channels from Canwest Television Limited Partnership and its subsidiaries in exchange for cash payments in excess of $400 million to those entities' senior subordinated noteholders and other affected creditors. Not all creditors were to receive repayment in full under the plan. The plan was sanctioned in June of 2010.

As in the Allen-Vanguard proceeding, the restructuring of Canwest Global Communications Corp. and its various subsidiaries also had to deal with certain shareholder claims. Whereas the Allen-Vanguard restructuring wiped out those shareholder claims as "equity claims", the Court in the Canwest proceeding urged the parties to come to a resolution that would provide benefit to the claims of shareholders despite the fact that those claims may, in fact, have been "equity claims".

The shareholders argued that the original restructuring proposal (supported by the noteholders), as presented at the time Canwest Global Communications Corp. filed for CCAA protection, was intended to be a recapitalization in which existing shareholders would receive 2.3% of the equity in a restructured Canwest Global Communications Corp. The original transaction had onerous conditions precedent standing in the way of its implementation, including a highly contentious negotiation with a third party holding a significant ownership interest in valuable assets shared with Canwest Global Communications Corp., which assets were the subject of complex contractual obligations between the parties. The subsequent transaction arising from an arbitrated negotiation among the principal parties to the restructuring including the noteholders and this significant third party, deleted any recovery to the existing shareholders, though did pave the way for a successful restructuring of the Canwest Global Communications Corp. broadcast media businesses. The Court's desire to ensure some benefit accrued to the complaining shareholders appears to have been driven by the fact that the shareholders had a conditional agreement with the Canwest Global Communications Corp. entities (supported by the noteholders) that any restructuring would result in some recovery to them, albeit nominal in nature. That understanding would have been negated by the proposed CCAA plan to the benefit of the noteholders. Shaw and Canwest Global Communications Corp. responded to the Court's concern by offering the complaining shareholders compensation directly from Shaw. The articles of incorporation of Canwest Global Communications Corp. would be amended under the Canada Business Corporations Act to reorganize the authorized capital of Canwest Global Communications Corp. with the result that the complaining equity holders would be deemed to exchange their existing shares for a class of non-voting preferred shares, which would then be purchased by Shaw.

According to the Court, the above result would not violate the provisions of subsection 6(8) of the CCAA. The rationale appears to be that the compensation received by shareholders of Canwest Global Communications Corp. in respect of their equity interests was received through a process independent of the CCAA plan and directly from Shaw. Thus, no other creditor who would have a claim to the Canwest Global Communications Corp. assets ahead of those shareholders would be prejudiced by the result as no other party could have any claim to the consideration provided by Shaw to the complaining shareholders.¹³

SECTION 4 – FUNDING OF REPRESENTATIVE COUNSEL

4.1 Re. Canwest Publishing Inc. (2010), 65 C.B.R. (5th) 152 (Ont. S.C.J.)

In March of this year, four former non-unionized employees of Canwest Publishing Inc. (together with its affiliates "Canwest") brought a motion for the appointment of representative counsel to protect their interests and those of similarly situated individuals in the Canwest CCAA proceedings. The costs of such representative counsel would be borne by Canwest.

Early on in the proceedings, a support agreement was entered with the senior secured lenders outlining the basis upon which those lenders would agree to support Canwest's restructuring efforts. The support agreement prohibited the Canwest entities from paying the proposed representative counsel in the circumstances. Accordingly, neither the Monitor nor the senior secured lenders supported the motion of the former employees. This created a significant dilemma for the Court – should it enforce the positions that the senior secured lenders and the Canwest entities had bargained for, or should it seek to ensure that the moving former employees were sufficiently represented, bearing in mind that the affected former employees did not take part in the negotiation of the support agreement? The Court resolved this dilemma in favour of the former employees as follows:

The Court then advised Canwest and the senior secured lenders to work with the former employees to structure the funding of representative counsel.¹⁵

Based on this endorsement, the Court appears to have a right, despite what may have been agreed to between the parties to a support agreement, to override that agreement. Presumably, however, such inherent jurisdiction would not be exercised as readily in the event that the rights and interests of the debtors or the lenders would be materially affected. The cost/benefit analysis in this case favoured the modest expense of appointment of counsel to represent the former employees who could not otherwise afford to pay for their own counsel.

Following the Court's endorsement, it may be that lenders cannot effectively contract out of the possibility of having to deal with representative counsel for employees of the debtor company, or other vulnerable parties who have a collective common interest that the Court feels should be protected. This is consistent with new provisions of section 11.6 of the CCAA that allow the Court, on notice to the secured creditors who are likely to be affected, to create a charge in respect of the fees and expenses of experts engaged by interested persons if the Court is satisfied that such charge is necessary for the effective participation of those persons.

As a related matter, when discussing the issue of whether representative counsel should be appointed, Madam Justice Pepall made a noteworthy comment that "[d]esirably, in my view, Canadian courts have not typically appointed an unsecured creditors committee to address the needs of unsecured creditors in large restructurings".¹⁶

SECTION 5 – JEOPARDY ORDER

5.1 Re. I. Waxman & Sons Limited, [2010] O.J. No. 2585 (Ont. C.A.)

A jeopardy order is a Court order that may be sought by the Canada Revenue Agency ("CRA") in accordance with the provisions of section 225.2 of the Income Tax Act (Canada) to collect outstanding amounts assessed against a taxpayer notwithstanding the fact that the taxpayer has filed a notice of objection against the assessment. CRA may do so if it satisfies the Court that there are reasonable grounds to believe that the collection of all or any part of an amount assessed in respect of a taxpayer would be jeopardized by a delay in the collection of that amount.

At March 5, 2007, I. Waxman & Sons Limited ("IWS") purportedly owed the CRA $704,735.53 in respect of corporate taxes, which amount was the subject of a notice of objection by IWS. On March 19, 2007, following service of the application for appointment of a receiver over IWS, but before an appointment order was granted, CRA applied for and received a jeopardy order from the Federal Court and collected the amount outstanding from IWS' bank. The CRA was apparently concerned that if the appointment order was granted, its claim would be stayed and would end up simply ranking pari passu with all other unsecured creditors. Subsequently, in September of 2008, IWS was declared bankrupt. In the bankruptcy, CRA filed a proof of claim in the amount of $489,330, representing taxes assessed for a period after the assessment to which the jeopardy order related.

The Trustee of IWS sought to partially set off amounts already paid to CRA under the jeopardy order against the amount claimed by the CRA in the bankruptcy. If one were to combine the outstanding taxes paid pursuant to the jeopardy order and the amount included on the proof of claim of the CRA, the total claim of CRA in the bankruptcy would have been between $1.1 and $1.2 million. The amount of over $700,000 already paid to the CRA under the jeopardy order would exceed the distribution that would otherwise be available in respect of the $1.1-1.2 million aggregate claim in the bankruptcy. The Trustee argued that the CRA should not be entitled to further distribution from the bankruptcy.

The Ontario Court of Appeal did not accept the Trustee's argument. In the result, the Court of Appeal held that the Trustee was seeking to mount a collateral attack on the jeopardy order of the Federal Court, which should not be allowed in the circumstances.¹⁷ The Court of Appeal also held that the purpose of the jeopardy order was not to preserve assets to which the CRA may have a claim, rather it was to allow the CRA to completely execute its rights in respect of the tax assessed and, as a result, the CRA effectively satisfied the debt outstanding to it at the date of the jeopardy order. As a result, the CRA did not have an obligation to account for any amounts to the Trustee, and the Trustee was not in a position to assert any rights of set-off as against the CRA.¹⁸

The above are some of the highlights in Ontario insolvency jurisprudence in 2010. While not a comprehensive review, these highlights are illustrative of some of the novel issues considered, and approaches taken, by Ontario Courts in the past year.

Footnotes

1. Mr. Cobb and Ms. Gauthier are members of the Insolvency and Restructuring Group of Ogilvy Renault LLP.

2. Tucker v. Aero Inventory (UK) Ltd., [2010] O.J. No.772 (Ont. S.C.J.) at para. 30.

3. Re. Nortel Networks Corp., [2010] O.J. No 1111 (Ont. S.C.J.) at para. 40.

4. Re. Nortel Networks Corp., [2010] O.J. No 1111 (Ont. S.C.J.) at para. 41.

5. The facts involved in the Nortel case did not raise any issue with respect to whether incremental termination and severance pay accrued through continued employment in the post-filing period would be treated differently. This issue has arisen in another case before the Ontario Court (Windsor Machine & Stamping Limited et al.; Ontario court file no. CV-08-7672-00CL).

6. Re. Nortel Networks Corp. (2009), 59 C.B.R. (5th) 23 (Ont. C.A.) at paras. 16 and 39.

7. Re. Nortel Networks Corp. (2009), 59 C.B.R. (5th) 23 (Ont. C.A.) at para. 46.

8. Re. Nortel Networks Corp. (2009), 59 C.B.R. (5th) 23 (Ont. C.A.) at para. 21.

9. Re. Nortel Networks Corp. (2010), 63 C.B.R. (5th) 44 (Ont. S.C.J.) at para. 73.

11. Re. Nortel Networks Corp. (2010), 63 C.B.R. (5th) 44 (Ont. S.C.J.) at paras. 83, 88 and 89.

12. See also Smurfit-Stone Container Canada Inc. (Re) (January 28, 2010), Toronto CV-09-7966-00CL (Ont. S.C.J.)..

13. Re. Canwest Global Communications, [2010] O.J. No. 2984 (Ont. S.C.J.) at para. 29.

13. Re. Canwest Global Communications, [2010] O.J. No. 2984 (Ont. S.C.J.) at para. 29.

17. Re. I. Waxman & Sons Limited, [2010] O.J. No. 2585 (Ont. C.A.) at para. 30.

18. Re. I. Waxman & Sons Limited, [2010] O.J. No. 2585 (Ont. C.A.) at paras. 43-44.

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