important supreme court of canada decision on ... - Goodmans

General Editor: Justin R. Fogarty, B.A., LL.B., LL.M
VOLUME 23, NUMBER 4 Cited as (2006), Nat. Insol. Review SEPTEMBER 2006
• IMPORTANT SUPREME COURT OF CANADA DECISION ON
RECEIVER LIABILITY AS A SUCCESSOR EMPLOYER •
Susan Rothfels, Orestes Pasparakis
Ogilvy Renault LLP
SUMMARY
On July 27, 2006, the Supreme Court <strong>of</strong> Canada released
its <strong>decision</strong> in GMAC Commercial Credit Corporation
— Canada v. TCT Logistics Inc., 1 [2006]
S.C.J. No. 36 (QL) dealing with, among other things,
the authority <strong>of</strong> Bankruptcy Courts to protect trustees
and receivers from successor employer liabilities by
issuing protective orders and by applying a stringent
threshold before leave to appeal to labour boards is
granted. In a majority <strong>decision</strong> written by Justice
• In This Issue •
IMPORTANT SUPREME COURT OF CANADA
DECISION ON RECEIVER LIABILITY AS A
SUCCESSOR EMPLOYER
Susan Rothfels, Orestes Pasparakis....................45
TESTING THE LIMITS OF CROSS-BORDER
JUDICIAL RECOGNITION: THE CASE OF FOREIGN
SOLVENT SCHEMES OF ARRANGEMENT
Graham D. Smith ................................................48
Abella, the Supreme Court strongly affirmed the exclusive
jurisdiction <strong>of</strong> the Ontario Labour Relations Board
(“OLRB”) and not the Bankruptcy Court to make a
successor employer determination and ruled that an
applicant need only establish that its claim has an
evidentiary foundation and is not frivolous in order to
obtain leave to proceed to the OLRB, with the effect
that protective orders such as were in place in this case
were not effective and that the Bankruptcy Court has
limited room to exercise a “gatekeeper role” to protect
receivers or trustees (and the creditors who seek their
appointment) from successor employer liabilities.
THE FACTS
This case arose from the failure <strong>of</strong> TCT Logistics
Inc., a national trucking company with over a dozen
operating companies and approximately 1300 employees
in numerous facilities across North America.
Some 42 <strong>of</strong> those employees were represented by the
appellant, Industrial Wood and Allied Workers <strong>of</strong>
Canada, Local 700 (the “Union”).
On January 24, 2002, following the discovery <strong>of</strong>
serious misrepresentations with respect to TCT’s operation
and financial performance, the Bankruptcy
Court appointed KPMG as interim receiver over
TCT’s assets pursuant to s. 47 <strong>of</strong> the Bankruptcy and
Insolvency Act, R.S.C. 1985, c. B-3, as amended. The

National Insolvency Review September 2006 Volume 23, No. 4
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EDITORIAL BOARD
GENERAL EDITOR
Justin R. Fogarty, B.A., LL.B., LL.M.
Bennett Jones LLP, Toronto
EDITORIAL BOARD MEMBERS
• Gerald N. Apostolatos, Langlois Kronström Desjardins
S.E.N.C.R.L./LLP, Montréal • Frank Bennett, Bennett &
Company, Toronto • Nicolas Brearton, KPMG Inc.,
Toronto • David F.W. Cohen, Gowling Lafleur Henderson
LLP, Toronto • Wayne Ehgoetz, Congress Financial
Corporation, Toronto • Jean-Yves Fortin, Brouillette
Charpentier Fortin, Montréal • William Neville, Neville
ADR Services Inc., Ottawa • William Riley, Barrister &
Solicitor, Vancouver • Melvin Zwaig, Zwaig Consulting
Inc., Toronto.
Note: This newsletter solicits manuscripts for consideration
by the General Editor, who reserves the right to reject any
manuscript or to publish it in revised form. The articles
included in National Insolvency Review reflect the views <strong>of</strong>
the individual authors. This newsletter is not intended to
provide legal or other pr<strong>of</strong>essional advice and readers should
not act on the information contained in this report without
seeking specific independent advice on the particular matters
with which they are concerned.
Receivership Order directed KPMG to take control <strong>of</strong>
TCT’s property and operations as the <strong>court</strong>’s <strong>of</strong>ficer
with a view to winding down the business in an orderly
manner and specifically provided that KPMG
would not be considered a successor employer in so
doing. It is <strong>important</strong> to note that at no time did the
Union challenge such protective provision.
KPMG quickly liquidated or shut down the various
divisions and subsidiaries <strong>of</strong> TCT. The last major
component <strong>of</strong> TCT’s business to be sold was the
warehousing division, which included the Union’s
employees. The sale occurred within four months <strong>of</strong>
the initial filing. The terms <strong>of</strong> the sale <strong>of</strong> that division
as a going concern to a newly created company were
approved by the Bankruptcy Court on notice to the
Union.
Pursuant to the agreement <strong>of</strong> sale, KPMG dismissed
all employees except for those required to
manage the wind down. The purchaser rehired approximately
three-quarters <strong>of</strong> the warehousing division
employees, including 19 <strong>of</strong> 42 <strong>of</strong> the Union’s
active members.
The Union applied to the OLRB seeking among
other things a declaration that the purchaser was a
successor employer to TCT and/or KPMG. The OLRB
stayed the application as against KPMG pending the
necessary <strong>court</strong> approval from the Bankruptcy Court
pursuant to s. 215 <strong>of</strong> the Bankruptcy and Insolvency
Act. Once again, it is noteworthy that the Union did
not assert its successor employer claim until after the
sale was completed.
THE DECISIONS BELOW
The Bankruptcy Court denied the Union leave to
pursue its successorship employee. It amended the
Receivership Order to provide that KPMG was only
immunized from “successor employer” status if it was
acting “qua realizer” (i.e., its operation <strong>of</strong> the business
was for the limited purpose <strong>of</strong> marshalling the assets
for sale) and determined that, in the case <strong>of</strong> TCT, it
had been doing so and should therefore be protected
from such claims.
On appeal, the majority <strong>of</strong> the Court <strong>of</strong> Appeal determined
that the Bankruptcy Court had not properly
applied the test for leave under s. 215 and remitted the
issue <strong>of</strong> leave to be determined by that <strong>court</strong> in accordance
with a test which considered factors relating to
the impact <strong>of</strong> the proposed claim upon the bankruptcy
process. The Receivership Order was again amended
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National Insolvency Review September 2006 Volume 23, No. 4
to delete the “qua realizer” qualification and to provide
instead that the protection remained only unless
or until a determination to the contrary was made by
the OLRB upon leave <strong>of</strong> the Bankruptcy Court.
THE SUPREME COURT DECISION
Justice Abella reversed the Court <strong>of</strong> Appeal and the
Bankruptcy Court. Instead, she found:
• the Bankruptcy Court does not have the jurisdiction
to determine whether an interim receiver is a
successor employer;
• the Bankruptcy Court must apply the same uniform
test for leave in all cases;
• that test is the Mancini test (Mancini (Trustee <strong>of</strong>)
v. Falconi, [1993] O.J. No. 146 (C.A.) (QL)),
which requires only a factual basis for a proposed
claim which, as drafted, discloses a cause <strong>of</strong> action
against the receiver or trustee;
• all other considerations are to be left to the OLRB
and the Bankruptcy Court is not to make the final
assessment <strong>of</strong> the merits <strong>of</strong> the claim.
Justice Abella found that the test proposed by the
majority in the Court <strong>of</strong> Appeal was inappropriate,
both because it was “more vague and more elaborate”
and because it undermined the OLRB’s jurisdiction
over successorship determinations. She held instead
that the Mancini test was sufficient to protect the integrity
and efficiency <strong>of</strong> the bankruptcy process and
that it was not inconsistent with the desired “single
control” theory <strong>of</strong> bankruptcy litigation.
In the case <strong>of</strong> TCT, the Supreme Court was satisfied
that the Mancini test was met (“it cannot be said
that the Union’s claim is frivolous or without an evidentiary
foundation”) and directed that the claim
should therefore proceed before the OLRB. Justice
Abella indicated that the OLRB was the proper forum
to address the arguments <strong>of</strong> KPMG and GMAC, as
secured creditor, concerning the impact upon such a
finding on the federal bankruptcy system and issues
<strong>of</strong> constitutional paramountcy.
The Bankruptcy Court now has very clear guidance
from the Supreme Court as to the test for leave to
commence actions against trustees and receivers under
s. 215 <strong>of</strong> the Bankruptcy and Insolvency Act. It is
also clear that trustees and receivers cannot be ‘immunized’
in any manner against successorship claims
in their appointment orders. Finally, through dicta in
her final remarks, Abella J. was critical <strong>of</strong> the practice
<strong>of</strong> failing to provide unions with advance notice <strong>of</strong>
motions to appoint interim receivers. She did not accept
the submissions <strong>of</strong> GMAC and KPMG in this
case that such advance notice to the numerous stakeholders
involved was impracticable — or indeed, impossible
— in the circumstances. Instead, she urged
that “advance negotiations” with unions in the future
may lead to compromise rather than litigation.
It remains to be seen in what circumstances, if any,
the OLRB will find that an interim receiver is a successor
employer (with the result that such claims as
termination and severance pay, which would otherwise
rank after the secured creditors, will become
their responsibility by virtue <strong>of</strong> indemnities and/or
priority charges for the interim receiver). In the interim,
creditors should be cognizant that a labour
board, in considering whether to impose successor
employer liability, may have a different focus than a
Bankruptcy Court which must consider and balance
all stakeholder interests before it. The Supreme Court
<strong>decision</strong>, while procedural in nature, might also be
seen as a shift in favour <strong>of</strong> union interests over secured
creditors in the insolvency process and any uncertainty
may force a re-examination <strong>of</strong>:
• the reserves established by lenders;
• the circumstances in which insolvent businesses
continue as a going concern; and
• the importance <strong>of</strong> entering into prior agreements
with any unions.
Since the <strong>decision</strong> was released, our law firm has already
restructured one imminent filing to eliminate any
receiver-like powers and instead the creditor will rely
solely upon the “Monitor” functions in a CCAA filing.
[Editor’s note: Susan Rothfels and Orestes Pasparakis
are both Partners at the law firm Ogilvy Renault LLP.
Ms. Rothfels and Mr. Pasparakis were counsel to
GMAC Commercial Credit Corporation in this case.]
1
The full text <strong>of</strong> the <strong>decision</strong> can be found at:
.
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National Insolvency Review September 2006 Volume 23, No. 4
• TESTING THE LIMITS OF CROSS-BORDER JUDICIAL RECOGNITION:
THE CASE OF FOREIGN SOLVENT SCHEMES OF ARRANGEMENT •
Graham D. Smith
Goodmans LLP
INTRODUCTION
Canadian <strong>court</strong>s have long been willing to recognize
and give assistance to foreign proceedings and
judgments where various recognition criteria are
met. These criteria have evolved and expanded over
time, reflecting the expansion <strong>of</strong> global commerce
and cross-border transactions. The primary focus <strong>of</strong>
the current test for recognition is whether the foreign
proceeding bears a real and substantial connection to
the action. 1 The evolution <strong>of</strong> recognition criteria has
in recent years included statutory jurisdiction to recognize
certain foreign insolvency proceedings. 2
The boundaries <strong>of</strong> recognition <strong>of</strong> foreign proceedings
continue to be tested, however, as shown in the
Ontario case <strong>of</strong> Re Cavell Insurance Co. 3 One U.K.
commentator observed the trial level <strong>decision</strong> was
“certainly commendable in its internationalist approach”
and “chimes with the general global trend <strong>of</strong>
facilitating cross-border restructuring”. 4 The case
raises, however, fundamental questions as to how far
the boundaries <strong>of</strong> recognition should be stretched in
the case <strong>of</strong> certain types <strong>of</strong> foreign proceedings, and
as to the role <strong>of</strong> conditional recognition as a device
in the recognition process.
BACKGROUND
Cavell, a company based in London, England, is a
“reinsurer”. Its business is to issue insurance coverage
(i.e., ‘reinsurance’) to insurance companies that
in turn have issued policies to their policyholders. In
the early 1990s, Cavell ceased to issue new policies
and it entered into what is known as a “run-<strong>of</strong>f” <strong>of</strong>
its reinsurance business, administering its assets and
dealing with its liabilities as they continue to develop
under those policies issued while it was still
underwriting. The run-<strong>of</strong>f was estimated to take a
few decades to run its course. Given the nature <strong>of</strong>
the risks that Cavell covered, many claims were expected
to be made, and/or to reach a state where they
can be finalized, only many years after the policies
were issued.
Cavell operated a Canadian branch under the provisions
<strong>of</strong> the Insurance Companies Act, 5 and its
predecessor legislation. Cavell’s estimate <strong>of</strong> the
value <strong>of</strong> its remaining known and unknown liabilities
under its Canadian branch policies was, at the
time <strong>of</strong> the hearing, approximately $6 million. Cavell
had approximately $23 million <strong>of</strong> assets in Canada,
most <strong>of</strong> which were vested in a trust pursuant to
Canada’s legislative and regulatory requirements in
respect <strong>of</strong> foreign insurers that operate Canadian
branches. Under the federal insurance regime, the
trust assets are effectively held for the benefit <strong>of</strong>
holders <strong>of</strong> policies issued by the Canadian branch,
constituting de facto security for payment <strong>of</strong> the
branch’s potential liabilities in the event the foreign
insurer becomes insolvent.
THE FOREIGN SCHEME OF ARRANGEMENT
Schemes <strong>of</strong> arrangement under s. 425 <strong>of</strong> the
Companies Act 1985 (U.K.) are an established
mechanism for finalizing the affairs <strong>of</strong> insolvent
companies to which the Act applies. Recently, however,
many solvent U.K. insurance or reinsurance
companies that are in run-<strong>of</strong>f have resorted to
schemes <strong>of</strong> arrangement as an exit strategy to terminate
all their policy liabilities, to put an early end to
the run-<strong>of</strong>f, and to free up the remaining capital that
would otherwise be held to back those liabilities.
In late 2004, Cavell announced it was putting
forth a solvent scheme <strong>of</strong> arrangement. As is typical
under solvent schemes, holders <strong>of</strong> Cavell reinsurance
policies would be required to file for the value
<strong>of</strong> not only all their known claims under those policies
as at a fixed date, but all future and unknown
claims. This necessarily requires an estimate <strong>of</strong> loss
claims that will be incurred, possibly over many
years. If a claimant and the scheme administrator
cannot agree on the value <strong>of</strong> a claim, an adjudicator
chosen by Cavell would make a final, binding estimate
valuation, which would then be payable in accordance
with the terms <strong>of</strong> the scheme. All rights <strong>of</strong>
Cavell’s policyholders to any other payment (including
for any actual losses incurred in excess <strong>of</strong> the
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National Insolvency Review September 2006 Volume 23, No. 4
estimate) would be fully extinguished and the policies
would be terminated.
Until Cavell’s scheme, no solvent foreign insurer
had sought to enforce such a scheme on policyholders
<strong>of</strong> the insurer’s Canadian branch.
THE FOREIGN PROCEEDINGS AND THE
RECOGNITION ORDER
In accordance with the practice in the U.K. <strong>court</strong>s,
Cavell first obtained an ‘initial order’ <strong>of</strong> the U.K.
<strong>court</strong> authorizing the proposed meeting <strong>of</strong> scheme
claimants and providing for notice <strong>of</strong> scheme proceedings.
Cavell then moved before the Commercial
List in the Ontario Superior Court and was granted
an order:
• recognizing the U.K. proceedings and the initial
U.K. order;
• limiting claimants with claims against Cavell’s
Canadian assets to pursuing such claims in the
U.K. scheme proceedings;
• permitting Cavell, upon approval by a requisite
majority <strong>of</strong> Cavell’s scheme creditors and the
U.K. <strong>court</strong> at a sanction hearing, to apply to the
Ontario <strong>court</strong> for scheme approval and such further
orders as deemed necessary, including orders
in respect <strong>of</strong> the claims process to be
instituted under the scheme; and
• staying all proceedings against Cavell or its
Canadian assets, unless leave <strong>of</strong> the Ontario
<strong>court</strong> is first obtained.
Several policyholders <strong>of</strong> Cavell’s Canadian
branch took issue with the Ontario recognition order,
and moved under its comeback provision to have it
set aside or varied. On the comeback hearing, the
Ontario <strong>court</strong>:
• confirmed its jurisdiction to recognize and assist
the U.K. scheme proceedings, and
• confirmed that the scheme proceedings would in
fact be recognized.
The trial <strong>court</strong>’s <strong>decision</strong> was appealed to the
Court <strong>of</strong> Appeal. The Court <strong>of</strong> Appeal rejected, and
overturned, the statutory basis <strong>of</strong> the trial <strong>decision</strong>.
At the same time, it upheld the recognition <strong>of</strong> the
initial U.K. order on the basis <strong>of</strong> private international
law, and significantly expanded the common law
parameters for recognition <strong>of</strong> foreign orders.
The facts <strong>of</strong> this case, and the expanding popularity
<strong>of</strong> foreign solvent schemes, bring to the fore issues
that likely will be subject to further debate in a
judicial or legislative context (or both), as the
boundaries <strong>of</strong> cross-border recognition continue to
be explored.
BASIS FOR THE RECOGNITION ORDER
No Canadian statute expressly confers jurisdiction
to recognize or assist foreign solvent schemes <strong>of</strong> arrangement.
Re Cavell held there was jurisdiction to
do this, however.
STATUTORY
At the trial level, jurisdiction was firstly found
under Ontario’s Reciprocal Enforcement <strong>of</strong> Judgments
(UK) Act, 6 which implements the Canada-
U.K. Convention Providing for the Reciprocal
Recognition and Enforcement <strong>of</strong> Judgments in Civil
and Commercial Matters (the “Convention”). The
trial <strong>court</strong> in Re Cavell rejected an argument that
the U.K. initial order was not a “judgment” for the
purposes <strong>of</strong> the recognition provisions <strong>of</strong> the Convention.
Also, although the Convention provides
that it does not apply to judgments that determine
the winding-up <strong>of</strong> companies, the <strong>court</strong> held that
the U.K. order did not fall within this exclusion, as
a solvent scheme <strong>of</strong> arrangement was not a winding-up
or akin to one. The <strong>court</strong> observed, however,
that the Convention “is a difficult read and awkwardly
presented”. 7
On appeal, the statutory basis for recognizing the
U.K. order was squarely rejected, however. The
Court <strong>of</strong> Appeal held that the U.K. order was not
recognizable under the Convention because (i) the
U.K. proceeding had not been served on the Canadian
parties, and (ii) the U.K. order was not a “final
order” within the meaning <strong>of</strong> the Convention.
PRIVATE INTERNATIONAL LAW
The <strong>court</strong> in Re Cavell invoked a second, independent
ground for recognizing the U.K. proceed-
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National Insolvency Review September 2006 Volume 23, No. 4
ings: the principle <strong>of</strong> comity, effected through the
vehicle <strong>of</strong> inherent jurisdiction. The objecting Canadian
policyholders argued that it was not an appropriate
case to invoke the comity principle, since the
process under the U.K.’s Companies Act 1985 significantly
diverged from the voluntary dissolution
process that would apply under Canadian legislation,
and since they would lose the unique benefit from
having the Canadian security for potential losses that
they may claim under their policies. The trial <strong>court</strong>
rejected this position, citing its conclusion that the
scheme was not a dissolution or winding-up, and the
fact that Canadian insurance regulator would retain
control over the release <strong>of</strong> the vested assets. 8
The Court <strong>of</strong> Appeal not only upheld the recognition
<strong>of</strong> the U.K. order on the basis <strong>of</strong> private international
law, but went some distance to expand the
boundaries <strong>of</strong> recognition on this basis. The Court <strong>of</strong>
Appeal noted that although traditionally under
Canadian law a foreign order must be final and res
judicata in the foreign jurisdiction (i.e., the foreign
<strong>court</strong> no longer has the power to rescind or vary it),
those prerequisites should no longer apply. Rather,
the focus should be on whether the purpose <strong>of</strong> those
requirements has been met. The Court <strong>of</strong> Appeal
defined the purpose <strong>of</strong> the traditional finality requirement
to be as “at least” threefold:
• to ensure the domestic <strong>court</strong> knows precisely
what it is agreeing to recognize and enforce;
• to remove the risk <strong>of</strong> the injustice that would be
done to the party against whom the foreign order
is enforced if that order is subsequently changed
by the foreign <strong>court</strong>; and
• to remove the risk <strong>of</strong> undermining public confidence
that might arise if the domestic <strong>court</strong> were
to issue a recognition order, only to have the
foundation <strong>of</strong> that order, namely the foreign order,
disappear.
The Court <strong>of</strong> Appeal recognized that obviously
the initial U.K. order did not in fact finally decide
the substantive issue affecting Cavell and the Canadian
policyholders because it did not approve the
scheme <strong>of</strong> arrangement and it merely commenced
the procedure which may lead to the U.K. <strong>court</strong> ultimately
approving the scheme. However, because it
found the U.K. order:
• to be “undoubtedly clear and certain”;
• to present “little if any risk <strong>of</strong> injustice” to the
Canadian policyholders; and
• to have “little risk <strong>of</strong> undermining public confidence
if the procedure initiated by the U.K. order
is changed following its recognition by the
Ontario <strong>court</strong>”, the purpose <strong>of</strong> the traditional finality
requirement was met here. 9
The Court <strong>of</strong> Appeal stated that: 10
…in an age where the rules <strong>of</strong> private international
law are evolving to accommodate the increasingly
transnational nature <strong>of</strong> commerce, I see no reason
why this result should be precluded by those rules
just because the foreign order to be recognized is not
final. In my view the want <strong>of</strong> finality carries with it
no substantive effect that should deny recognition.
The Court <strong>of</strong> Appeal also expressly held that there
were “strong policy reasons” for giving recognition to
the initial U.K. order. In particular, “[t]he doctrine <strong>of</strong>
comity is well served by an Ontario recognition
order”, as is “[t]he related notion <strong>of</strong> reciprocity”. 11
With respect to the latter, the <strong>court</strong> stated that each <strong>of</strong>
the Canada Business Corporations Act and the Business
Corporations Act (Ontario) has procedures for
approving solvent schemes <strong>of</strong> arrangement, and: 12
If an Ontario <strong>court</strong> were administering such a
scheme, and it affected interests in the United
Kingdom, the <strong>court</strong> would hope for the same recognition
<strong>of</strong> its orders as is sought in this case.
The Court <strong>of</strong> Appeal also held that, under private international
law, the failure to serve the Canadian interests
with the U.K. proceeding was irrelevant, as the
Canadian interests had been accorded “a fair process”.
Lastly, the Court <strong>of</strong> Appeal held that the “real and
substantial connection test” was met in this case, as
the subject matter was a scheme <strong>of</strong> arrangement proposed
by a U.K. company under U.K. law and it
would affect all the creditors <strong>of</strong> the company, only a
small percentage <strong>of</strong> which are in Canada.
CONDITIONS ON RECOGNITION
In an interesting aspect <strong>of</strong> Re Cavell, the trial
<strong>court</strong> did not grant carte blanche recognition to the
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National Insolvency Review September 2006 Volume 23, No. 4
U.K. proceedings, however. Rather, the <strong>court</strong> recognized
the Canadian parties’ “valid criticism” that
under the scheme the adjudicator <strong>of</strong> claims would
have absolute discretion with respect to making his
determination, which would be final and binding and
“absent any meaningful right <strong>of</strong> appeal”. The <strong>court</strong>
thus imposed express conditions on its recognition,
including that:
• the scheme adjudicator must reach a valuation
based on the Canadian rules applying to valuations,
recognizing that Canada requires the trust
assets to be held;
• there will be a right <strong>of</strong> judicial appeal if the
scheme adjudicator fails to apply the Canadian
rules; and
• the scheme administrator and the scheme adjudicator
must act in good faith and treat the
Canadian policyholders fairly. 13
These conditions were not changed by the Court <strong>of</strong>
Appeal.
The <strong>court</strong>’s use <strong>of</strong> conditions on recognition <strong>of</strong>
the foreign order appears to be an attempt to
“finesse” the effect <strong>of</strong> the foreign proceeding where
it did not at its root <strong>of</strong>fend the Canadian <strong>court</strong> so as
to justify outright refusal to grant recognition, but
where some aspects <strong>of</strong> the foreign proceeding appeared
to the <strong>court</strong> to require adjustment to protect
legitimate Canadian concerns. It will be interesting
to see whether this conditional technique is adopted
by Canadian <strong>court</strong>s in future cases.
TESTING THE LIMITS — THE ‘UNIVERSALIST’
APPROACH AND THE ROLE OF PUBLIC POLICY
One <strong>of</strong> the grounds long-recognized in the common
law for refusing recognition <strong>of</strong> a foreign order
(and codified in the Convention) is where enforcement
<strong>of</strong> the judgment would be contrary to public
policy in the jurisdiction <strong>of</strong> the domestic <strong>court</strong>. Re
Cavell raises the interesting question <strong>of</strong> the impact
that should be accorded Canadian public policy, especially
that inherent in a regulatory regime for foreign
companies that choose to do business in
Canada.
The trial <strong>decision</strong> in Re Cavell forcefully
espouses the view that the Canadian policyholders
knowingly dealt with a U.K.-based entity, and therefore
subjected themselves to the consequences <strong>of</strong>
U.K. company law, including a solvent scheme <strong>of</strong>
arrangement. Indeed, the <strong>court</strong> states that there is
“much merit” in the proposition in American jurisprudence
(known as the ‘universalist’ approach) that
parties who deal with a foreign company impliedly
subject themselves to the laws <strong>of</strong> the foreign government
affecting the powers and obligations <strong>of</strong> the
company, and “anything done at the legal home <strong>of</strong>
the corporation, under the authority <strong>of</strong> such laws,
which discharges it from liability there, discharges
that everywhere”. 14
It must be noted that Anglo-Canadian law, however,
in fact appears to be contrary to this proposition.
Canadian <strong>court</strong>s favour a more contextualized
approach when determining what law should govern
international disputes. 15 In the context <strong>of</strong> a foreign
bankruptcy, the Supreme Court <strong>of</strong> Canada squarely
rejected the purely “universalist” approach suggested
by the American jurisprudence that would
necessarily have bankruptcy disputes settled by the
law <strong>of</strong> the place <strong>of</strong> bankruptcy. 16 The Supreme Court
<strong>of</strong> Canada has also held that in determining the
proper law <strong>of</strong> an insurance contract, the location <strong>of</strong>
the head <strong>of</strong>fice is only a factor to consider, and is not
determinative <strong>of</strong> the law governing the contract. 17
The Court <strong>of</strong> Appeal <strong>decision</strong> does not appear to address
this issue.
In the case <strong>of</strong> contracts entered into under a Canadian
regulatory regime, such as the insurance regime,
arguably there is an especially compelling
case that foreign company law should not be applied
to discharge obligations where that would defeat the
implicit Canadian policy principles under which the
foreign company voluntarily undertook to do business
in Canada. The trial <strong>court</strong> in Re Cavell clearly
took comfort from the fact that the Canadian insurance
regulator still controlled the release <strong>of</strong> the foreign
insurer’s trust assets held in Canada. However,
one may ask if an equally <strong>important</strong> public policy
interest is that a Canadian branch’s policyholder
bargained for insurance coverage in accordance with
its insurance policy, and not for a forced termination
at an estimated value — even if payment <strong>of</strong> that estimated
value is protected by the security. The estimated
value may ultimately bear no relation to the
indemnification that it would otherwise be entitled to
for as yet unknown, but very real, losses. Even if a
forced termination scheme were not itself contrary to
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National Insolvency Review September 2006 Volume 23, No. 4
Canadian public policy, arguably there should be
financial recognition <strong>of</strong> the distinct economic benefit
arising from the required security (trust assets) for
branch liabilities over and above the general creditworthiness
<strong>of</strong> the insurer. A termination <strong>of</strong> rights that
are backed by a special, legislated creditworthiness
may be deserving <strong>of</strong> higher compensation in the
valuation process than the termination <strong>of</strong> rights for
which the sole recourse is to the general, less certain,
creditworthiness <strong>of</strong> the insurer.
Another reality — and complication — arising
from an expansive approach to recognition <strong>of</strong> unusual
foreign proceedings is that the law in the foreign
jurisdiction may itself evolve at a fundamental level.
Shortly after the Re Cavell trial <strong>decision</strong>, the U.K.
High Court <strong>of</strong> Justice, Chancery Division, Companies
Court, rendered a judgment in the first opposed sanction
hearing for a solvent scheme <strong>of</strong> arrangement in
respect <strong>of</strong> an insurance company: Re British Aviation
Insurance Company Limited (“BAIC”). 18
In BAIC, the U.K. <strong>court</strong> held that it was not necessary
to rule on the fairness <strong>of</strong> the proposed scheme because
the scheme’s proponent had failed to meet the
jurisdictional threshold when it incorrectly constituted
the classes <strong>of</strong> creditors. Nonetheless, the <strong>court</strong> went on
to hold that it would have refused to sanction the
scheme in any event, given the unfair aspects <strong>of</strong> the
scheme including the fact that creditors would no
longer be indemnified but would only be paid an estimate
<strong>of</strong> their liability. This criticism is to a large degree
a criticism <strong>of</strong> the inherent aspect <strong>of</strong> any solvent scheme
<strong>of</strong> arrangement for an insurance company, and goes to
the fundamental principles underlying the appropriateness
<strong>of</strong> such schemes. Domestic <strong>court</strong>s considering the
question <strong>of</strong> granting recognition and assistance orders
(or indeed the ultimate sanctioning <strong>of</strong> a foreign
scheme) will need to carefully consider the role and
impact <strong>of</strong> such considerations in their own analysis. 19
[Editor’s note: Graham D. Smith is a senior partner
in the litigation group <strong>of</strong> Goodmans LLP.]
1
2
3
See, e.g., Beals v. Saldara, [2003] S.C.J. No. 77
(QL), [2003] 3 S.C.R. 416.
Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3,
ss. 267-275 and Companies’ Creditors Arrangement
Act, R.S.C. 1985, c. C-36, s. 18.6.
The trial level consideration <strong>of</strong> the Re Cavell case
actually involved three <strong>decision</strong>s <strong>of</strong> Justice Farley in
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
the Ontario Superior Court <strong>of</strong> Justice – Commercial
List: the reasons issued on the initial recognition
hearing, the reasons issued on a subsequent
“come-back” motion, and reasons following a further
hearing on the terms <strong>of</strong> the order made on the
come-back hearing. These can be found respectively
at Cavell Insurance Co., Re, [2004] O.J. No. 5166
(QL), 2004 Can LII 48709, 6 C.B.R. (5th) 11
(S.C.J.); Cavell Insurance Co. (Bankruptcy), Re,
[2005] O.J. No. 645 (QL), 2005 Can LII 4094
(S.C.J.) (“Cavell (No. 2)”); and Cavell Insurance
Co., Re, [2005] O.J. No. 1725 (QL), 2005 Can LII
14315 (S.C.J.) (“Cavell (No. 3)”). The Court <strong>of</strong> Appeal’s
<strong>decision</strong> was released May 23, 2006, [2006]
O.J. No. 1998 (QL); supp’l reasons, [2006] O.J. No.
3448 (C.A.) (QL).
L. Chan Ho, “A new byword for cross-border restructuring:
Scheme <strong>of</strong> arrangement as judgment
(Re Cavell)”; Lloyd’s Maritime and Commercial
Law Quarterly, Vol. 2005, Part 3, August 2005, 295-
302, 297, 300-301.
S.C. 1991, c. 47.
R.S.O. 1990, c. R.6.
Re Cavell (No. 2), paras. 8-15.
Interestingly, the Convention and comity might not be
applied reciprocally by a U.K. <strong>court</strong>: L. Chan Ho, supra,
note 4, at 300.
Cavell (C.A.), supra, note 3, at paras. 44 and 45.
Ibid., at para. 54.
Ibid., at para. 48.
But see supra, note 4, at para. 49.
Re Cavell (No. 2), paras. 17-18 and Re Cavell (No.
3), paras. 9-10.
Re Cavell (No. 2), para. 14, citing, Canada Southern
Ry. Co. v. Gebhard, 109 US 527 (1883).
Castel and Walker, Canadian Conflict <strong>of</strong> Laws, 6th
ed., looseleaf (Markham: Butterworths, 2005), 31.2.
Holt Cargo Systems Inc. v. ABC Containerline N.V.
(Trustees <strong>of</strong>), [2001] S.C.J. No. 89 (QL), [2001] 3
S.C.R. 907, 940-945.
Imperial Life Assurance Co. <strong>of</strong> Canada v. Colmenares,
[1967] S.C.R. 443, 449.
[2005] EWHC 1621 (Ch).
Interestingly, the trial <strong>court</strong> in Re Cavell (No.2), supra,
note 3, at para. 5 noted that the Canadian insurance
regulator took the position in that case that the
scheme matters were primarily a contractual matter
between Cavell and its Canadian reinsureds. The position
<strong>of</strong> a Canadian regulator in this or other areas
may be influential for <strong>court</strong>s in future cases where the
effects <strong>of</strong> a foreign proceeding potentially clash with
Canadian public policy.
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