Overview of rights of enforcement and recognition of cross border insolvencies under Canadian law

1. Ship Arrest North America
Cross Border Marine Insolvencies in Canada
General Canadian concepts in cross border insolvencies
The Canadian insolvency statutory regime
Enforcement of creditors claims outside insolvency
Role of insurance in insolvency proceedings
Recognition of foreign insolvency proceedings
William M. Sharpe
Barrister & Solicitor
Toronto www.shipping-law.ca wmsharpe@shippinglaw.ca

2. Where no pending Canadian insolvency proceeding
Asset transfer under foreign judicial or insolvency proceeding
▪ Recognized under comity if real & substantial connection
▪ Foreign marine obligations a matter of substantive law and subject
to conflict of laws rules
▪ Priority between creditors matter of law of the forum
▪ Judicial sales in rem recognized if
▸foreign court has jurisdiction
▸ due diligence in identifying buyer at fair value
▸ creditors have notice and due process to prove claims
▸effect of sale is free and clear

3. General Canadian Concepts
Critical cases - 1
The ‘IOANNIS DASKELELIS” 1974 Supreme Court
Maritime obligation given lien status under foreign law
enforceable in Canada even if obligation would not
have maritime lien status if it had arisen in Canada
Qualification: The “NORDEMS” 2011Federal Court of Appeal
Foreign law must be demonstrably applicable to obligation
under conflicts of law rules
Contract - choice of law clause, or if no clause, closest
and most real connection
Tort - law of the place of the tort

4. General Canadian Concepts
Critical Cases - 2
The “Brussel”
Re Antwerp Bulk Carriers 2001 Supreme Court of Canada
Belgian bankruptcy trustee of ship arrested in Halifax attempted to
halt Federal Court of Canada in rem sale process by stay
application to Quebec Bankruptcy Court NO CAN DO
Recognition of foreign bankruptcy proceedings subject to secured
creditors rights under Canadian bankruptcy law to enforce against
collateral outside bankruptcy
Still good law in Canada after adoption of UNCITRAL Cross
Border Insolvency law principles

5. The provincial law toolkit
Ancillary remedies to federal insolvency proceedings
Assignments and preferences statutes
Challenge payment to one creditor to prejudice of others
Fraudulent conveyances statutes
Challenge sale or mortgage of assets to defeat creditors
Corporate oppression remedies
challenge improvident disposition of assets
May be invoked by bankruptcy trustee, judgment
creditor, or interested party in reorganization
proceedings

6. The Statutory Regime
Bankruptcy and Insolvency Act
▪ Liquidation of assets for benefit of creditors
▪ Secured creditors may continue to enforce against
collateral, subject to trustee’s right to challenge validity
of secured interest
▪ If deficiency after enforcement, secured creditor
shares pro rata with unsecured creditors
▪ Maritime lien holders and ship mortgagees are BIA
secured creditors
▪ Creditors may obtain assignment of debtor’s claims
against 3rd parties with participation pro rata

7. Companies Creditors Arrangement Act
Creative financial reorganization and continuation in business
limited only by debtors ingenuity and creditors vote
▪ Enabling statute allowing reorganization under
standstill of claims and due process to stakeholders
▪ Under supervision of court and monitor
▪ May take years to work out
▪ Classes of creditors must have rights to prove claims
and to vote
▪ Sale of assets free and clear
▪ If creditors or courts reject, debtor deemed bankrupt

8. Two Fundamental Differences
1 - Control of Property
BIA - assets vest in Trustee, subject only to secured
creditors rights against collateral
CCAA - debtor continues to own its property and
usually to continue operations in some form, subject to
monitor’s and court’s supervision

9. 2 - Reordering of Priorities
BIA CCAA
Secured claims under All assets, income stream and
Canadian maritime law creditors claims administered
enforced outside bankruptcy under proposal
Cost of creating fund Administration charge
Government liens DIP charge
Tort liens Critical supplier charge
Contract liens ⇓
Possessory liens ?
Registered ship mortgages ?
Equitable charges
Administered within bankruptcy Secured creditors vote as separate classes

10. Recognition of Foreign Insolvency Proceedings
BIA Part 13 CCAA Part 4
Follows Uncitral Model Law
Not automatic but obtained on court application
Foreign proceeding main or non-main
Main proceeding - locus of administration and proof of claims
in foreign proceeding with Canadian assistance
Non main proceeding - claims can continue to be enforced
in Canada
Continuing duty of Foreign Insolvency Representative
to notify Canadian court of material changes

11. Controls on Recognition
Any legal or equitable rule may be applied not inconsistent with
BIA, CCAA e.g. marshalling, equitable subordination
Court may decline remedies inconsistent with public policy
BIA s. 271(3) subject to the exceptions specified by the
court ... that would apply in Canada had the foreign
proceeding taken place in Canada under this Act e.g
secured creditors rights
“This is not to say that foreign bankruptcy orders will only be recognized if they
faithfully mirror the provisions of Canadian bankruptcy law. It is to say, however, that
protection of secured creditors is a strong public policy in our bankruptcy scheme...”
Binnie, J. Antwerp Bulk Carriers

12. Concurrent Reorganization Proceedings
Well developed law for international cooperation
CCAA explicitly provides for concurrent proceedings - s. 275
Calling in aid of foreign courts
Cooperation protocols between Canadian and US courts
Cross recognition of administration and DIP charges attaching to
debtors property in both countries
Regulation of payment to creditors of dividends from concurrent
proceedings
Examination of witnesses
Authorizing foreign representative to take possession of or sell
property in Canada
If new foreign insolvency proceeding after initial recognition order,
Canadian court must review order

13. Insurance in insolvency
Foreign insurance coverage available to extent proper law of contract allows
▪ Proceeds of 3rd party liability insurance for benefit of
3rd party claimant, not all creditors of estate
▪ Marine policy terms voiding cover if insolvency
enforceable in Canada
▪ Pay to be paid p&I clauses enforceable in Canada
▪ No general federal direct action rights against marine
insurers
▪ Direct rights of action given by international treaties
to which Canada is party e.g. Civil Liability Convention

14. The moral of the story
If you are a maritime lienholder or mortgagee
claimant, come one come all, Canada is welcoming
but beware the shipowner intending to apply for
reorganization in Canada or elsewhere
If you are a ship operator, pay overdue bills before
trading into Canada
If you are mortgagee of a ship trading into Canada,
ensure the mortgagor’s financial reporting is
current and ensure the mortgagor is current on
payables
Consult a maritime lawyer