Bill C-55 will catalyze litigation over jurisdictional standards and degrees of protection, says Scott Bomhof in Lawyers Weekly

February 17, 2006

New insolvency legislation that has passed in the United States, pending in Canada’s Bill C-55, could increase cross-border insolvency work and bring exciting developments in the field.

"I think there’s going to be a big jump in the workload in the near future," predicts Scott Bomhof.

With Bill C-55, Canada has adopted elements of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, similar to those recently adopted by the United States in Chapter 15 of U.S. Code—Title 11 (Bankruptcy).

The main difference for Canadian insolvency law, says Scott, is that under the new model, the "ancillary proceeding" concept, which regulates the recognition of a foreign judgment by deeming it as either a foreign proceeding or not, has been replaced with the concept of two types of proceedings: a "foreign main proceeding" and a "foreign non-main proceeding". If a proceeding is recognized as a foreign main proceeding, further deference would be given by the domestic proceedings court to the foreign court.

Determining the sort of proceeding it will be, says Scott, turns on the term “centre of main interest” (COMI), for which there is currently no definition. The presumption is that a corporation’s centre of main interest is where its main office is—unless there is evidence to the contrary.

Companies may respond by going the way of multijurisdictional main filings, leading to the possibility that a company could attempt to shop for a jurisdiction that provides it with a greater advantage, in the hope that the secondary forum will simply recognize the foreign order.

"I think what we’re going to find is that because COMI is a completely new concept to us in North America," says Scott, "for the next few filings, there’s going to be a lot of litigation over which standard to apply—and what degree of protection a company can get.”

The COMI concept has been in use in the European Union for a few years and there has been significant litigation there, says Scott, as to where the centre of main interest lies when dealing with subsidiary companies that have independent management in a subsidiary jurisdiction with a corporate head office outside that jurisdiction. These disputes are a harbinger of battles to come in North America; and North American insolvency lawyers will likely look to European case law for interpretation. But without a higher court like the European Court of Justice to resolve cross-border disputes, there may be Further uncertainties about primary jurisdiction over a particular entity.

"It’s possible that we’ll end up at some point having different rulings on the same proceeding on both sides of the border with no dispute resolution between the countries as to where in fact the centre of main interest is," says Scott.

One focal point is the difference in how collective agreements and pensions are treated in the two countries’ legislation. Under Bill C-55, Canada debtors will not be able to unilaterally terminate collective agreements in Bankrupcy and Insolvency Act proposals, nor in Companies’ Creditors Arrangement Act proceedings. In the United States, however, there is a process for doing so if debtors can demonstrate that changes in their relationships with employees and pensioners are necessary to achieve a successful restructuring.

Bill C-55 has not been proclaimed yet. It has been given Royal Assent, but the outgoing Liberal government committed not to have it proclaimed in force until June 30 so that the Senate Committee, Industry Canada and other stakeholders could review it and provide input.

When Bill C-55 is proclaimed in force, says Scott, "We’ll be starting from a new set of rules."

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