Canada: Ontario Court Of Appeal Confirms Bondholders Not Entitled To Post-Petition Interest

The Ontario Court of Appeal (Court) recently affirmed the decision of the Ontario Superior Court of Justice in Nortel Networks Corporation (Re) (Nortel),¹ that the "interest stops" rule applies in proceedings under the Companies' Creditors Arrangement Act (Canada) (CCAA)². Specifically, the Court held that the "interest stops" rule applies in liquidating CCAA proceedings, such as Nortel, as parties retain the right to provide for the payment of post-filing interest in a CCAA restructuring plan.

The "interest stops" rule requires that creditors' claims stop accruing interest as of the date of an insolvency filing. Accordingly, the Court held that the appellant bondholders were not entitled to claim interest accruing post-CCAA filing.

Background

The appeal was brought by the Ad Hoc Group of Bondholders, representing a substantial number of unsecured "crossover bonds", for which various US and Canadian Nortel entities are liable as either principal obligors or guarantors. The CCAA does not expressly prohibit asserting a claim for post-filing interest. As a result, the crossover bondholders took the position that they were entitled to claim post-filing interest pursuant to the terms of the relevant indentures under which their bonds were issued, providing for the continuing accrual of interest until payment. 

Holders of the crossover bonds filed claims for principal and pre-filing interest in the amount of US$4.092 billion against the applicable Canadian and US Nortel debtors. They also claimed an entitlement to post-filing interest which, as of December 13, 2013, amounted to approximately US$1.6 billion. These amounts represent a substantial portion of the approximately US$7.3 billion total proceeds available for distribution to all of Nortel's creditors, generated from the worldwide sale of its businesses. A successful claim for post-filing interest by the crossover bondholders would substantially reduce the amount of proceeds available for distribution to Nortel's other creditors—notably pensioners and former employees—who do not enjoy either a contractual or statutory right to post-filing interest.

The decision

Prior to the release of the lower court's decision in Nortel, it was unsettled whether unsecured creditors could claim for post-filing interest in CCAA proceedings.³ In contrast, the Bankruptcy and Insolvency Act (Canada) (BIA) does not allow unsecured creditors to claim for post-filing interest unless there is a surplus remaining after payment of all debts (not including interest).⁴  

The Court [DJ1] in Nortel found that the "interest stops" rule applies in CCAA proceedings. However, the Court expressly clarified that its ruling does not prevent a CCAA restructuring plan from providing for the payment of post-filing interest, which is common practice. 

In support of its analysis for the application of the "interest stops" rule in CCAA proceedings, the Court noted that this rule is a necessary corollary of the pari passu principle. This principle, which is a governing principle of insolvency law in Canada and many other legal jurisdictions, provides that the assets of an insolvent debtor are to be distributed rateably amongst the debtor's unsecured creditors (subject to the claims of prior-ranking creditors). Without the "interest stops" rule, the Court held, the fairness and orderly distribution sought to be obtained by the pari passu principle could not be achieved.

The Court cited various additional reasons for imposing the "interest stops" rule in CCAA proceedings, including:

1. It harmonizes the CCAA with the BIA,
2. It ensures that creditors without a contractual right to post-filing interest will not be incentivized to prefer liquidation proceedings over a CCAA reorganization,
3. It  preserves the status quo post-filing, and
4. It reinforces the principle of fairness.

Previous judicial decisions had permitted claims for interest post-filing in CCAA proceedings⁵; however the Court of Appeal in Nortel limited those decisions to their specific facts and noted that they should be read in light of the Supreme Court of Canada's more recent decisions that emphasize the need to harmonize the two statutory schemes under the BIA and CCAA.

For these reasons, the Court of Appeal dismissed the crossover bondholders' appeal.

It should be noted that the Court of Appeal in Nortel only considered the bondholders' contractual entitlement to post-filing interest. Pursuant to the decision of the Supreme Court of Canada in Canada 3000 (Re), discussed by the Court in Nortel, post-filing interest may be available where the entitlement to such interest is provided for by statute.⁶

Footnotes

1. Re Nortel Networks Corporation, 2015 ONCA 681 affirming Re Nortel Networks Corporation, 2014 ONSC 4777.

2. Companies' Creditors Arrangement Act, RSC 1985, c C-36.

6. See Nortel, supra, at paras 67-69 and Canada 3000 (Re), supra, at paras 93-96.   

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