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From Comity To Bill C-55: Evolution Of Cross-Border Insolvency In Canada.

Article Excerpt
Reproduced with permission from BNA's Bankruptcy Law Reporter, Vol. 18, No. 37, pp. 866-871 (Sept. 28, 2006).

Copyright 2006 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com

With the elimination of trade barriers and the marked increases in trade between jurisdictions, businesses in Canada and the United States have found themselves more closely connected than ever. Statistics provide a snapshot of the increasing cross-border interdependence between the United States and Canada. In 2004, foreign direct investment into Canada totalled $365.7 billion, of which $238 billion came from the United States alone. Likewise, the single largest recipient of Canadian investment is the United States.1

The increased trade and corporate interaction between the United States and Canada has also led to challenges in the insolvency context as creditors increasingly find themselves dealing with a debtor that is outside the home state of the creditor. This has resulted in a need to harmonize bankruptcy proceedings in various jurisdictions and to allow for recognition of foreign insolvency proceedings when the companies are involved in a filing across one or more borders. Until the 1990s, cross-border insolvencies were dealt with under the rules of comity. More recently, section 18.6 of the Companies' Creditors Arrangement Act2 and the corresponding provisions of the Bankruptcy and Insolvency Act3 provided a statutory framework for Canadian courts to harmonize proceedings that have cross-border elements.

Canada and the United States are about to embark on a new stage in the history of cross-border insolvency proceedings. The United States has recently adopted elements of the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) in Chapter 15 of the U.S. Bankruptcy Code.4 Canada, through Bill C-55,5 has done the same. Bill C-55 represents a dramatic change from the flexible (and brief) provisions governing cross-border insolvencies currently found in the BIA and CCAA. The detailed nature of the new provisions, as discussed in this paper, may provide clarity for proceedings, but also may restrict the creativity and discretion currently afforded to Canadian courts in dealing with cross-border proceedings.

We outline below the development of the various frameworks for recognition of international insolvency orders in Canada, starting with the common law and rules of comity and going through the existing statutory frameworks and new provisions in Bill C-55, which has been enacted but is still not in force.

International Recognition of Foreign Judgments

Until recently, cross-border harmonization and recognition of foreign judgments in Canada has been based largely on the principle of comity, both inside and outside the insolvency context. The concept of comity and the test for recognition of foreign judgments in Canada were outlined in Morguard Investments Ltd. v. De Savoye,6 a case outside the insolvency context that dealt with the recognition of a decision from another province. Here, the Supreme Court of Canada referred to previous decisions in providing a definition of comity that has been used widely by Canadian judges:

''Comity'' in the legal sense, is neither a matter of absolute obligation, on the one hand, nor one of mere courtesy and good will, upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.7

The court held that comity should be applied in circumstances where there is a ''real and substantial connection'' between the jurisdiction where the judgment was given and the action before the court.

This seminal decision was applied by the Supreme Court of Canada in Beals v. Saldhana,8 which dealt with the enforcement in Canada of a judgment from Florida. Here, Justice Major, for the majority, held that the ''real and substantial connection'' test articulated in Morguard in the context of judgments from other provinces also applies to the recognition and enforcement of foreign judgments from courts outside Canada. The court also stated that enforcement of foreign judgments is not absolute. In some circumstances a foreign decision will not be enforced, including where enforcement of a foreign judgment is antithetical to the Canadian view of natural justice, public policy, or fraud.9 However, the court cautioned that natural justice, public policy and fraud should not be used lightly as defenses, and that the defense of public policy should have a narrow application.10

Comity in Recognition of Insolvency Proceedings

In the context of insolvency, courts in Canada have consistently adopted the notion of comity and have tended to enforce foreign bankruptcy orders, with some notable exceptions. Two companion decisions from the Supreme Court of Canada, Re Antwerp Bulkcarriers N.V.11 and Holt Cargo Systems Inc. v. ABC Containerline N.V. (Trustees of)12 (collectively, the Holt Cases) articulate a detailed analysis of the Canadian approach to the recognition of foreign insolvency orders under the doctrine of international comity. Here, the court articulated an approach that considers, inter alia, the interests of the litigants before it and other affected parties in Canada as well as the desirability of international cooperation and other relevant circumstances. This approach recognizes that Canadian courts do not simply rubber-stamp commands issuing from the foreign court of the primary bankruptcy. The court will consider the juridical advantage that those disadvantaged by deferral to the foreign court would enjoy in a Canadian court. It will also consider public policy expressed in Canada's bankruptcy laws and will not issue an order to aid a...