Canada: Recognition of U.S. Bankruptcy Proceedings by Canadian Courts

Presented at the 4th International Symposium on Bankruptcy, June 2004.

With the reduction of trade barriers and the introduction of open borders pursuant to bilateral and international agreements such as the North American Free Trade Agreement, there has been a steady increase in the cross-border commerce between Canada and the United States. The statistics show the extent to which U.S. capital plays a major role in the Canadian market place. For instance, in 2002, investment from sources in the United States represented $224,330,000,000 of the total foreign direct investment in Canada of $349,388,000,000. At the end of 2003, United States investors had invested $229,684,000,000 in Canadian bonds, $71,325,000,000 in Canadian stocks and $12,754,000,000 in Canadian money market instruments.¹

As cross-border commerce has expanded, a greater number of multi-national companies are establishing "branch" locations or local subsidiaries in jurisdictions outside of their home territory. This is particularly true with respect to American companies setting up operations within Canada and Canadian companies setting up operations within the United States. Despite the multi-national presence of corporations, it must be remembered that corporations still operate within the territorial jurisdiction of the countries in which their assets and operations are located. In the case of an insolvency involving a multi-national corporation, the limits of territorial jurisdiction are often put to the test.

Despite a number of procedural and substantive differences between the bankruptcy laws of Canada and the United States, Canadian courts have shown a willingness to extend recognition to bankruptcy proceedings commenced in the United States and to enforce orders issued in U.S. bankruptcy proceedings within the territorial jurisdiction of Canada. The recognition of such proceedings was originally carried out under the doctrine of "international comity" and more recently pursuant to the statutory authority to recognize a "foreign proceeding" under each of the Bankruptcy and Insolvency Act (Canada)² and the Companies’ Creditors Arrangement Act (Canada)³. For the reference of non-Canadian readers, key insolvency legislation in Canada is found in two separate federal statutes. The BIA deals with liquidations and winding up of a bankrupt entity (similar to Chapter 7 of the U.S. Bankruptcy Code⁴) and contains provisions for a short-term restructuring of an insolvent entity in the context of a stay of proceedings (similar to Chapter 11 of the U.S. Bankruptcy Code⁵), whereas the CCAA is a statute which allows companies to restructure their debts and/or share capital under judicial supervision in the context of a court imposed stay of proceedings (similar to Chapter 11 of the U.S. Bankruptcy Code).

In order to understand the extent to which U.S. bankruptcy orders will be recognized in Canada, it is helpful to look at the historical recognition of foreign insolvency orders under the common law doctrine of "international comity" and also in the context of the more recent statutory amendments to the BIA and the CCAA.

The leading definition of "comity" in Canada is as follows:

Comity is the basis upon which a court may recognize and enforce an order or decree from a foreign court within its own territorial jurisdiction. As with most common law countries, Canadian courts do not automatically recognize an order issued from a foreign court as it applies to persons or assets located within Canada, even where such order purports to have extraterritorial effect (such as a stay under Chapter 11 of the U.S. Bankruptcy Code). However, under the doctrine of comity, the Canadian court may, in the appropriate circumstances, enforce a foreign order in Canada.

The leading case on the recognition of foreign judgments is the Supreme Court of Canada (the "SCC") decision in Morguard Investments Ltd. v. De Savoy. In this case, which involved the recognition of an order of one Canadian province in another Canadian province, the SCC rejected earlier principles of English case law which restricted the enforcement of a foreign judgment to a number of limited circumstances. The SCC held that the principles behind the previously imposed restrictions on the enforcement of foreign judgments which were the historic basis for such limitations, notably the difficulty in travelling far distances to defend an action at the turn of the century and less sophisticated foreign legal processes, were no longer valid considerations in many cases. In this context, La Forest J. stated "[m]odern states … cannot live in splendid isolation and do give effect to judgments given in other countries in certain circumstances … [t]his … was in conformity with the requirements of comity, the informing principle of private international law".⁷ The SCC held that for the reasons of justice, necessity and convenience, comity should be applied in situations where the judgment was given by a jurisdiction that had a "real and substantial connection" with the action. While the Morguard decision specifically involved the enforcement of an order of a provincial court in another province of Canada, it has often been cited as applying to the enforcement of a foreign order within Canada.

In 1993, the SCC was faced with similar issues, but this time in an international context. In Amchem Products Inc. et al. v. Workers’ Compensation Board (B.C.)⁸, the SCC was asked whether an anti-suit injunction issued by a British Columbia court to prevent the continuation of actions commenced in Texas should be upheld. In that case, 194 people had brought a suit for damages against asbestos companies in Texas. The majority of the claimants were British Columbia residents, but none of the asbestos companies were resident in British Columbia. Most of the asbestos companies carried on business in Texas in the form of asbestos manufacturing plants and some had their corporate offices located in Texas. Most of the companies were incorporated in the United States, but not in the state of Texas.

The Texas court found jurisdiction and venue. The asbestos companies challenged this finding on the grounds of forum non conveniens, a doctrine that is not recognized in Texas, arguing that virtually all of the alleged exposure occurred while the claimants were resident and working in British Columbia. The asbestos companies successfully applied in the Supreme Court of British Columbia for anti-suit injunctions against the claimants, in order to prevent the continuation of the Texas actions. The Texas court in turn issued an "anti-anti-suit" injunction, with a limited period of currency, prohibiting the seeking of such injunctions in British Columbia.

At the trial level, Esson C.J.S.C. of the British Columbia court held "that if the local court decides that its jurisdiction is the natural forum for the adjudication of the dispute, and that the plaintiff is acting oppressively through the foreign proceedings, the local court can enjoin the plaintiffs from proceeding with the foreign action, if doing so would be in the interests of justice."⁹ Esson C.J.S.C. felt that British Columbia was a natural forum and that the proceeding in Texas was oppressive because the doctrine of forum non conveniens was not recognized in that jurisdiction.

The injunctions were upheld on appeal. The British Columbia Court of Appeal also found the absence of the doctrine of forum non conveniens oppressive and the court believed "that comity was of little importance because the injunction [was] not directed to the foreign court but only to the appellants who were British Columbia residents."¹⁰ The case was then appealed to the SCC, which overturned the lower court decisions and dismissed the application for an injunction. Sopinka J. stated:

One of the key limitations to a Canadian court’s willingness to enforce a foreign order within the territorial jurisdiction of Canada is based upon public policy. Even where a foreign order would otherwise be enforceable in Canada under the concept of international comity, courts have consistently held that any foreign order which offends the public policy of Canada will not be enforced in this country. A leading case on this exception is the decision of the Ontario High Court of Justice in Re Westinghouse Electric Corporation and Duquesne Light Company et al.¹², which involved an application to the Ontario court to enforce letters rogatory issued by the United States District Court for the Eastern District of Virginia, Richmond Division and by the Court of Common Plees for Alleghany Pennsylvania, Civil Division. In this case, letters rogatory were issued in respect of an action brought against Westinghouse by 16 public utility companies in state and federal courts in the United States for breach of contract for failure to supply uranium. At the same time, Westinghouse brought an action against a number of uranium producers, alleging the parties to be involved in anti-competitive arrangements to prevent the supply of uranium, which was also the defence being pleaded by Westinghouse in the action brought against it by the public utility companies. Letters rogatory were issued at the request of Westinghouse to examine, among others, a representative of the Government of Canada. The Attorney General for Canada filed materials indicating that the issues before the Canadian court involved a government mandated informal marketing arrangement among non-U.S. producers of uranium which had been taken to stabilize the uranium market situation. The affidavit also stated that the arrangements were subject to Crown privilege and that the details of the arrangements were confidential and that it would not be in the public interest to disclose such details.

The Ontario court refused to enforce the letters rogatory in Canada holding that the enforcement of letters rogatory is based upon international comity and that comity will not be exercised in violation of the public policy of the state to which the request is made. Given that a representative of the Government of Canada had provided evidence that the Government had concluded that the information should not be disclosed as a matter of Canadian public policy, the Ontario court should give effect to such policy and it would be inappropriate to invoke the principle of comity in violation of such stated Canadian public policy.

The guiding principles set out in Morguard, Amchem and decisions such as Westinghouse are that, in the appropriate circumstances, the courts of Canada will recognize and enforce within the territorial jurisdiction of Canada appropriate orders of a foreign court or tribunal. The aforementioned cases are all in the context of commercial disputes and did not involve insolvency situations. However, the underlying principles of the cases have been applied in a number of insolvency situations to allow the enforcement of foreign insolvency proceedings within Canada.

The most recent pronouncements on the recognition of foreign proceedings under the doctrine of international comity from the SCC involve two companion decisions in Re Antwerp Bulkcarriers N.V.¹³ and Holt Cargo Systems Inc. v. ABC Containerline N.V. (Trustees of)¹⁴. The SCC decisions in Antwerp and Holt Cargo (collectively, the "Holt Cases") contain a detailed analysis of the Canadian approach to the recognition of foreign insolvency orders under the doctrine of international comity. The Holt Cases involved conflicting claims arising from three jurisdictions, as follows:

1. the owner of the ship was a Belgian company and was placed into bankruptcy proceedings under Belgian law;
2. U.S. suppliers to the ship asserted a maritime lien under U.S. law; and
3. the vessel was located in Canadian waters and was arrested pursuant to an order issued by the Federal Court of Canada at the request of the holders of the U.S. maritime liens.

In this case, the Belgian bankruptcy trustees initially applied for a stay of the Federal Court of Canada proceeding before the Federal Court of Canada after the proceeding had been commenced and orders had been issued for the sale of the ship. The Federal Court of Canada refused to stay the proceeding and the Belgian trustees subsequently obtained an order from a provincial bankruptcy court in Quebec declaring a stay of all proceedings against the assets of the bankrupt Belgian company and specifically requesting that actions in the Federal Court of Canada be stayed in recognition of the Belgian bankruptcy proceedings. The Federal Court of Canada refused to honour the provincial bankruptcy order and continued the sale proceedings for the ship. Appeals were launched of both the provincial bankruptcy order granting a stay in recognition of the Belgian bankruptcy proceedings and the Federal Court of Canada proceedings dealing with the enforcement of the maritime lien against the vessel. The SCC, in its companion rulings, upheld the decision of the Federal Court of Canada and held that the provincial bankruptcy court had exceeded its jurisdiction in making an order staying the proceeding before the Federal Court of Canada.

One of the key considerations for the SCC was the nature of the proceeding before the Federal Court of Canada. Under Canadian bankruptcy law, secured creditors are entitled to continue to enforce their security notwithstanding a bankruptcy and are not stayed by a bankruptcy filing¹⁵. The SCC also noted that the U.S. lien claimants would face more difficulty in enforcing their claim for lien under Belgian law then they would under Canadian law.

The court examined five factors in upholding the decision of the Federal Court of Canada to continue the maritime lien proceeding notwithstanding the foreign bankruptcy:

1. The Belgian bankrupt was not placed in bankruptcy under the laws of Canada and the only proceeding before the provincial bankruptcy court was for the recognition and implementation of the orders issued by the foreign bankruptcy court.
2. At the time of the application to the provincial bankruptcy court, the bankruptcy courts in Belgium and Canada had a legitimate interest in the in rem action in the Federal Court of Canada given that legal title to the vessel remained with the bankrupt company, although heavily encumbered by security that far exceeded the value of the vessel.
3. A Canadian bankruptcy court has a responsibility to consider the interests of litigants before it and other affected parties in this country as well as the desirability of international co-operation and other relevant circumstances. In this regard, its function is not simply to rubber-stamp commands issuing from the foreign court of the primary bankruptcy and the exigencies of international co-operation, while a significant factor, were not a factor that necessarily trumped all other factors.
4. Given that a Canadian bankruptcy court derives its authority from Canadian law, when a Canadian court is called upon to lend assistance to a foreign bankruptcy court, Canadian law requires our courts to consider as one of the relevant circumstances the juridical advantage of those disadvantaged by deferral to the foreign court would enjoy in a Canadian court.
5. The public policy expressed in Canada’s own bankruptcy laws is a relevant consideration and an order should not be issued by a Canadian court to aid and assist a foreign court where such order would not be in accord with the internal laws of Canada.¹⁶

In Holt Cargo, the SCC specifically examined the various models for the recognition of a foreign insolvency proceeding. The court examined both the "universalist" approach and the "territorialist" approach and accepted the following definitions:

The SCC rejected both the "univeralist" and "territorialist" approaches and held that the Canadian approach was somewhere in the middle of the two models:

In endorsing the "puralist" model, the SCC has mandated a discretionary approach for judges in Canada with respect to the recognition of foreign insolvency orders. In each case, a judge is required to examine the factors outlined by the SCC and the facts of the proceeding before it to determine whether or not the Canadian court should, or should not, enforce the requests and orders of the foreign bankruptcy court in Canada.

In the context of U.S. bankruptcy proceedings, courts in Canada have typically shown a willingness to enforce U.S. bankruptcy orders on the basis of international comity. Among other factors, courts have examined the similarities between the Canadian bankruptcy system and the U.S. bankruptcy system in determining that Canadian creditors are granted roughly equivalent treatment under U.S. bankruptcy law that they would be entitled to under Canadian law. However, as pointed out by the SCC in the Holt Cases, no foreign bankruptcy order can be "rubber-stamped" by a Canadian court and it is always necessary to examine the matter before recognizing and enforcing the order in Canada.

One of the leading cases on the recognition of a Chapter 11 proceeding in Canada under the doctrine of international comity is Roberts v. Picture Butte Municipal Hospital et al, ¹⁹. In Roberts, Dow Corning Corporation ("DCC") applied to the Alberta court for a permanent stay of the Canadian claims related to product liability actions for breast implant leaks, on the grounds that the court should recognize the jurisdiction of the U.S. Bankruptcy Court for the Eastern District of Michigan, Northern Division. DCC had filed for Chapter 11 protection under the U.S. Bankruptcy Code after being unable to settle over 700,000 claims, including 30,000 arising in Canada. Section 362 of the U.S. Bankruptcy Code automatically stayed all actions including extraterritorial claims, such as those in Canada. The Canadian claimants argued that Canadian courts are not bound automatically by the stay imposed by the U.S. Bankruptcy Code, as comity is a discretionary matter, and that the court’s discretion should not be exercised in favour of DCC.

In deciding that comity should in fact apply, and that a stay should be imposed, Justice Forsyth commented on the similarity between the U.S. Bankruptcy Code and the BIA in regards to stay provisions. Section 362 of the U.S. Bankruptcy Code provides for an automatic stay once bankruptcy proceedings are commenced in the U.S.:

Section 69 of the BIA has a similar provision:

Justice Forsyth stated that these provision have the same underlying philosophy - to ensure a fair distribution of assets among all creditors, not just those who happen to have begun proceedings prior to the initiation of bankruptcy.²⁰ Justice Forsyth also cited the test outlined above in Amchem. As the court had found that the U.S. Bankruptcy Code and Canadian bankruptcy legislation had similar procedures and procedural safeguards, he determined that it was appropriate to recognize the U.S. Chapter 11 proceedings under the doctrine of comity and the stay was granted.

In 1997, amendments were made to both the BIA and the CCAA. At the time of the amendments, it was contemplated that the statutory provisions would leave the recognition of foreign insolvency proceedings with a bankruptcy judge, but that, "[i]t will now be clear; authority will be in place to facilitate or coordinate international insolvencies".²¹

Section 18.6 of the CCAA applies specifically to "foreign proceedings" which are defined as:

The CCAA sets out a statutory framework for the recognition of any foreign bankruptcy proceeding which qualifies as a "foreign proceeding". The key provisions are as follows:

As part of the 1997 amendments to Canada’s insolvency legislation, similar provisions dealing with the recognition of "foreign proceedings" were added to the BIA. For the purposes of comparison, the key provisions of the BIA dealing with international insolvencies are set out below:

As previously noted, the CCAA is a federal statute which allows a company to restructure its debts and/or share capital under court supervision and subject to a stay of proceedings. Given the inherent limitations of the BIA proposal provisions, primarily being a limitation of the availability of a stay of proceedings to six months in the aggregate, large corporate restructurings are almost always carried out under the CCAA in Canada . Outside of the restructuring provisions of the BIA, the BIA is primarily used by insolvent debtors that are being liquidated and wound up. Given the time and complexity involved in Chapter 11 proceedings, it is generally considered necessary to seek a recognition order under the CCAA in the event of a cross-border restructuring in order to take advantage of the broader discretion available to a judge under the CCAA as opposed to seeking recognition of the Chapter 11 proceedings under the BIA. Since ancillary proceedings in Canada with respect to Chapter 11 proceedings are typically commenced under the CCAA, the focus of the remainder of this paper with will be on the international insolvency provisions of the CCAA. However, given the similarities between the provisions, the comments herein should also apply equally to applications for recognition of "foreign proceedings" under the BIA.

As previously noted, in the Holt Cases the SCC addressed the issue of the recognition of a Belgian bankruptcy order in Canada under the principles of "international comity" given that the 1997 statutory amendments to the BIA and CCAA were not in effect at the time that the matter was commenced before the lower courts. However, by the time the SCC rendered its decisions in the Holt Cases, the "international insolvency" amendments to the BIA and CCAA had been proclaimed in force. While the SCC could not apply them to the situation before it, they did comment upon the provisions and noted that the provisions did not signal any change in the pre-statutory approach to the recognition of foreign bankruptcy proceedings in Canada. As such, the SCC has indicated that the statutory provisions appear to be a codification of the pre-statutory case law as opposed to breaking new ground. In this regard, Mr. Justice Binnie stated:

Given the comments of the SCC in Holt Cargo, it appears that the 1997 statutory amendments to the BIA and the CCAA will not result in a radical overhaul of the manner in which Canadian courts recognize and enforce foreign insolvency orders within Canada. Rather, the pre-1997 case law will still be relevant with respect to guiding a judge as to whether or not a foreign bankruptcy order should or should not be recognized in Canada.

Re Babcock & Wilcox Canada Ltd.,²³ was the first case to deal with the 1997 international insolvency amendments to the CCAA in a substantive manner. Babcock involved asbestos tort claims against Babcock & Wilson Canada Ltd., a Canadian company with a U.S. parent corporation. The U.S. parent had commenced Chapter 11 proceedings in the U.S. Bankruptcy Court in New Orleans and had received a temporary restraining order against U.S. resident plaintiffs in all asbestos litigation. The presiding U.S. Bankruptcy Court judge, as part of the restraining order, "further requested the aid and assistance of the Canadian courts in carrying out the U.S. Bankruptcy Court’s orders", with respect to potential plaintiffs asserting claims against the Canadian subsidiary.²⁴ Babcock & Wilson hoped to resolve all of the outstanding claims under the mass tort trust system that is part of the U.S. Bankruptcy Code, and thereby be able to successfully reorganize itself. Further to the U.S. Court orders, the Canadian subsidiary applied to the Ontario court for an interim stay of proceedings under section 18.6 of the CCAA.

The Honourable Mr. Justice Farley set out the following guidelines for the application of this section:

In addition to outlining the guidelines listed above, the Honourable Mr. Justice Farley further stated that the application for ancillary relief "should be reviewed in light of (i) the doctrine of comity as analyzed in Morguard …, in regard to its international aspects; (ii) inherent jurisdiction; (iii) the aspect of the liberal interpretation of the CCAA generally; and (iv) the assistance and codification of the 1997 amendments".²⁶ Using these parameters, the Honourable Mr. Justice Farley found that the application should be granted as:

The Honourable Mr. Justice Farley expressly noted the similarities between Chapter 11 proceedings under the U.S. Bankruptcy Code and restructuring proceedings under the CCAA. As such, he had very little difficulty finding that the Babock & Wilcox proceedings under Chapter 11 qualified as a "foreign proceeding" under the CCAA and that the tests of equitable and fair treatment were met.

Re Matlack Inc.²⁸ was another case heard by the Honourable Mr. Justice Farley, with respect to an application for recognition of a proceeding commenced pursuant to Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware and for the issuance of a stay of proceedings in Canada. In this case, Matlack, Inc. was a carrier based in Pennsylvania that transported chemical products throughout the U.S., Canada and Mexico. In Ontario, Matlack, Inc. operated a large leased facility from which its Canadian licensed fleet serviced customers throughout Ontario and Quebec. The company had obtained a stay of all actions in the U.S. pursuant to its Chapter 11 proceedings, but a Canadian creditor had seized and was threatening to sell certain assets in satisfaction of its claim.

Drawing upon the principles in Morguard, the Honourable Mr. Justice Farley stated,

The Honourable Mr. Justice Farley found that the granting of the stay would better allow for a reorganization of the company and prevent Canadian creditors from getting a "leg up" on American creditors who were subject to a stay of proceedings under Chapter 11.

Finally, the Honourable Mr. Justice Farley also noted that the relief requested was appropriate and in accordance with the principles set forth in the Transnational Insolvency Project of the American Law Institute, specifically the Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases.³⁰ While this was the first case that incorporated the Communication Guidelines, they have since been used in subsequent cases, including the Systech Retail Systems Inc. reorganization,³¹ with proceedings in Toronto and Raleigh, North Carolina.

The statutory provisions are not limited to procedural steps such as granting a stay of proceedings but also apply to substantive matters. in Re Loewen Group Inc.³², the Ontario Superior Court of Justice was asked to recognize a plan put forward by the Loewen companies under Chapter 11 of the U.S. Bankruptcy Code (the "US Plan") and grant a vesting order transferring certain assets in furtherance of the US Plan. Although Loewen had filed for protection under both the CCAA in Canada and Chapter 11 in the U.S., it only filed the US Plan and did not file a Canadian plan under the CCAA. The Honourable Mr. Justice Farley held that the Ontario Court could grant the relief requested and recognize the US Plan and make it effective against Canadian creditors pursuant to section 18.6(2) of the CCAA.

On December 9, 2002, United Air Lines, Inc. ("United") filed voluntary petitions pursuant to Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the Northern District of Illinois. United is the second largest scheduled passenger airline in the world, employing approximately 68,000 employees worldwide. United’s principal place of business was located in Illinois, but the company leased three facilities in Canada and employed approximately 170 employees in Canada. In addition, United was a party to various bilateral and multilateral alliances with other airlines, including Air Canada, Canada’s largest scheduled airline.³³

On December 11, 2002, The Honourable Mr. Justice Eugene Wedoff of the U.S. Bankruptcy Court ordered a stay of all proceedings against United. At the time of the Chapter 11 stay order, United was a party, along with Air Canada and a number of other airlines, to an uncertified class action lawsuit commenced by proposed representatives of travel agents in three Canadian provinces. The lawsuit before the Federal Court of Canada was in its early stages and had not yet been certified as a class action. The Honourable Mr. Justice Farley expressly ruled that the Chapter 11 proceedings under the U.S. Bankruptcy Code qualified as a "foreign proceeding" within the meaning of section 18.6 of the CCAA and made the following comments with respect to the similarities between Chapter 11 and CCAA:

Following the issuance of the stay of proceedings and recognition order under section 18.6 of the CCAA, the proposed class representatives in the Federal Court of Canada action brought two motions to lift the stay of proceedings in Canada to allow the class action proceedings to continue. In the first motion, heard on September 11, 2003, Mr. Justice Farley reiterated his previous comments in Matlack and Babcock and held that the granting of a recognition order and stay of proceedings in Canada was appropriate in the circumstances. In doing so, he noted:

Not all applications for ancillary relief are granted. There are cases where the judge has decided not to enforce a foreign insolvency order because the court felt to do so would prejudice or be an injustice to the Canadian claimants or not be in accord with Canadian public policy. The Holt Cases are an example of such a ruling outside of the context of the statutory provisions for recognition of international insolvencies.

In Canadian Imperial Bank of Commerce v. ECE Group Ltd.³⁶ the Honourable Mr. Justice Farley did not grant a stay in recognition of liquidation proceedings commenced pursuant to the U.S. Bankruptcy Code as he felt that there was insufficient evidence before the court to show that Canadian creditors were being treated fairly by the US plan. The Honourable Mr. Justice Farley felt that by deferring to the U.S. court, the Canadian court would be binding the creditors to recover from a $2.9 million insurance pool when there was indication that the amount of available insurance money may in fact be as high as $15 million.³⁷ The Honourable Mr. Justice Farley said that it was "premature" to grant the order, an indication that the nature of the proceeding must be fair in order for the court to use its discretion to grant comity. He also cited Westinghouse with respect to the importance of public policy in recognizing foreign orders.

The approach adopted by courts in Canada to the recognition of a foreign insolvency order is to leave the recognition and enforcement of such orders to the discretion of the presiding judge. Canada has rejected both the "territorialist" and the "univeralist" approach, rather adopting what the SCC refers to the "puralist" approach whereby courts are required to consider a number of factors in determining whether to recognize and enforce a foreign insolvency order in Canada. The good news for U.S. practitioners is that there is a large body of case law which has held that, absent extraordinary circumstances, Chapter 11 proceedings under the U.S. Bankruptcy Code should be recognized and enforced in Canada as a result of the close economic ties between the countries and the similarities between the prevailing bankruptcy legislation in both countries which has allowed Canadian judges to determine that Canadian creditors will generally be treated fairly and equitably in proceedings commenced under the U.S. Bankruptcy Code. However, given the "puralist" approach in Canada, it is clear that there are circumstances in which a Canadian judge can refuse to recognize and enforce a Chapter 11 order in Canada, particularly when the U.S. order somehow offends Canadian public policy or is divergent from the policy underlying the bankruptcy laws of Canada. In each case, it will be necessary to bring an application seeking recognition and outlining for the court the reason that ancillary proceedings are required in Canada and the manner in which Canadian creditors will be treated in the U.S. proceedings.

1. Canada, Ministry of Industry, Canada’s International Investment Position, Catalogue No. 67-202-XIE, v. 1, no. 4, (Ottawa: Statistics Canada, 2004) at 48.

2. R.S.C. 1985, c. B-3 [hereinafter BIA].

3. R.S.C. 1985, c. C-36 [hereinafter CCAA]

4. 11 U.S.C. 1982 [hereinafter U.S. Bankruptcy Code].

5. The BIA proposal provisions for restructuring of an insolvent debtor limit the time period during which court protection may be granted to six months in the aggregate and are typically not relied upon by larger companies.

6. Morguard Investments Ltd. et al. v. De Savoy, [1990] 3 S.C.R. 1077 [hereinafter Morguard] at 1096.

7. Ibid. at 1095.

8. [1993] 1 S.C.R. 897 [hereinafter Amchem].

9. Ibid. at 909.

10. Ibid. at 911.

11. Ibid. at 934.

12. 16 O.R. (2d) 273 (H.C.J.) [hereinafter Westinghouse].

13. [2001] 3 S.C.R 951 [hereinafter Antwerp].

14. [2001] 3 S.C.R. 907 [hereinafter Holt Cargo].

15. The impact of a bankruptcy under Canadian law should be distinguished from a restructuring proceeding under either the BIA or the CCAA, each of which does allow for the issuance of a stay prohibiting the enforcement of security.

16. Holt Cargo, supra note 15 at paras. 30-35.

17. Ibid. at para. 23.

18. Ibid. at para. 80.

19. (1998), 227 A.R. 308 [hereinafter Roberts].

20 .Ibid. at paras. 8 and 22.

21. Canada, Proceedings of the Standing Senate Committee on Banking, Trade and Commerce, issue 13 (November 4 sitting).

22. Holt Cargo, supra note 15 at paras. 82-84.

23. (2000), 18 C.B.R. (4^th) 157 (Ont. S.C.J.) [hereinafter Babcock].

24. Ibid. at para. 2.

25. Ibid. at para. 21.

26. Ibid. at para. 13.

27. Ibid. at para. 8.

28. Re Matlack Inc. (2001), 26 C.B.R. (4^th) 45 (Ont. S.C.J.) [hereinafter Matlack].

29. Ibid. at para. 5.

30. A copy may be obtained at www.iiiglobal.org/international/projects/ali.pdf [hereinafter Communication Guidelines].

31. Toronto: Re Systech Retail Systems Inc., Case No. 03-CL-4836 and Raleigh: Re Systech Retail Systems Inc., United States Bankruptcy Court for the Eastern District of North Carolina, Case No, 03-00142-5-ATS.

32. Re Loewen Group Inc. (2001), 32 C.B.R. (4^th) 54 (Ont. S.C.J.) [hereinafter Loewen].

33. Coincidentally, Air Canada itself was subject to a CCAA proceeding at the time that United sought recognition of its Chapter 11 proceedings in Canada.

34. Re United Air Lines, Inc., unreported, Court File No. 03-CL-5003, May 16, 2003 at paras. 1-2.

35. Re United Air Lines, Inc., unreported, Court File No. 03-CL-5003, September 29, 2003 at para. 6.

36. 23 C.B.R. (4th) 92.

37. Farley does state though that if indeed the $2.9 million is all that is available then the plaintiffs would not be prejudiced by the fact that they would only be able to recover a portion of their damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.