A US Bankruptcy Court's recent decision provides important insights for Canadian debtor companies that are involved in cross-border restructurings and are seeking recognition of Canadian insolvency proceedings in the United States.
In Re: Iovate Health Sciences International Inc., et al., a Chapter 15 proceeding involving the Ontario-based Iovate group of companies, Chief Judge Martin Glenn of the US Bankruptcy Court for the Southern District of New York issued reasons to address the "recurrent issue" of when an entity may rebut the presumption that its “center of main interests” (referred to as COMI) is in the jurisdiction of its registered office.1 Those reasons were issued in support of provisional relief that the Iovate group sought to, among other things, temporarily preserve its assets in the United States while the Canadian insolvency proceedings continue. The formal recognition hearing is pending as of the date of this article.
Chapter 15 of the US Bankruptcy Code provides a framework for recognizing foreign insolvency proceedings in the United States and facilitating cooperation with foreign courts. Relief under Chapter 15 helps protect Canadian debtors with business or assets in the US from enforcement actions by US creditors that could derail the restructuring process. When a debtor applies for Chapter 15 recognition, the US court hearing the matter must decide whether the foreign proceeding qualifies as a "foreign main proceeding", i.e., that proceeding where the debtor's assets and affairs are supervised by the foreign court for the purpose of a liquidation or restructuring. That determination turns on where the debtor’s COMI is located.
The COMI Framework
In Iovate, Chief Judge Glenn confirmed the US Bankruptcy Court's previous articulation of a non-exhaustive list of factors that help determine whether the presumption that a debtor's COMI is where its registered office is located has been displaced. These include: (i) the location of the debtor's headquarters; (ii) the location of those who actually manage the debtor; (iii) the location of the debtor's primary assets; (iv) the location of the majority of the debtor's creditors, or a majority of the creditors who would be affected by the case; and (v) the jurisdiction whose law would apply to most disputes.
The expectations of creditors and other interested parties are also relevant to this analysis, as a debtor company's COMI must be "ascertainable by third parties". Courts will evaluate these expectations by reviewing publicly available documentation that could guide creditors' understandings of the nature and risks of their investments.
Impact of Pre-Filing Restructuring Efforts on COMI
In addition, the US Bankruptcy Court may also consider a debtor company's pre-filing restructuring efforts and conclude that COMI has shifted. Chief Judge Glenn noted that such pre-filing restructuring activities, particularly where the debtor company is an entity with limited operations in the United States, may constitute its "primary business activity" prior to filing a Chapter 15 petition.
Material pre-filing restructuring efforts can include negotiating or executing a restructuring framework or support agreement, organizing creditor meetings, or facilitating related operational or liquidation activities or administrative functions. The US Bankruptcy Court may look to bad faith indicators such as "insider exploitation, untoward manipulation, and overt thwarting of third party expectations" in undertaking a holistic analysis to determine if a debtor company has opportunistically manipulated COMI prior to an insolvency filing in its preferred jurisdiction.
In Iovate, the US Bankruptcy Court granted the provisional relief sought and noted that the Canadian insolvency proceeding would likely be recognized as the foreign main proceeding for the debtor group of companies, despite one of those entities being incorporated in Delaware and having its registered office there, as the debtor group was controlled and operated out of Ontario with highly integrated management in Canada.
Looking Ahead
Iovate follows the recent Oak and Fort and Giftcraft proceedings, each of which are before Chief Judge Glenn, involving Chapter 15 recognition in which at least one entity in the debtor group was a US corporation whose COMI was found to be in Canada. Iovate confirms that the US Bankruptcy Court will continue to closely scrutinize a debtor companies' COMI, including those activities the companies undertook in the weeks immediately before, and possibly in contemplation of, an insolvency filing. Debtor companies planning cross-border insolvency filings should anticipate this issue and ensure that their US operations have a clear nexus to Canada and be aware that restructuring efforts in anticipation of filing may impact its COMI.
If you require assistance on issues relating to insolvency matters, including cross-border insolvency issues between Canada and the United States, please contact a member of the Bennett Jones Restructuring and Insolvency group.
Bennett Jones LLP acts for the majority shareholder of the debtor group in the NOI proceedings of Iovate Health Sciences International Inc., et al., and for the court-appointed monitor in the CCAA proceedings of Oak and Fort Corp., et al.
Bennett Jones