Should I stay or should I go (effective)? A framework for recognition of a foreign Plan and Sanction Order under appeal in the foreign jurisdiction

Introduction

Cross-border commercial insolvencies are high-stakes affairs. Debtor companies and their stakeholders often pour immeasurable resources into the development, negotiation and pursuit of a Plan of Arrangement (or its foreign equivalent). If and when that Plan surmounts the hurdles of a creditor vote and court sanction, the pressure to close the Plan, give effect to its terms and distribute value to claimants can be enormous.

Contrast these high stakes with the typical process for appealing a Plan and Sanction Order (or its foreign equivalent), which might take months, or years, to yield a final result. In many jurisdictions, including the United States, there is no automatic stay of an order sanctioning or confirming a Plan, and debtor companies may move forward with implementing a Plan under appeal provided that no stay order is entered. If the debtor waited to close its Plan until such an appeal were exhausted, the value the Plan is meant to unlock remains stuck in limbo (or worse, deteriorates).

This tension creates a potential dilemma for Canadian courts overseeing ancillary proceedings under Part IV of the Companies’ Creditors Arrangement Act [CCAA]¹ when they are asked to recognize, and give effect in Canada to, a foreign Plan and Sanction Order that are under appeal in the foreign plenary proceedings. A successful appeal might lead to an awkward, inconsistent result: a Plan fully in force in Canada, but vacated, in full or in part, in the foreign jurisdiction.

This article proposes that the legal analysis governing Canadian enforcement of foreign judgements and arbitration awards under appeal or review in the foreign jurisdiction is, with some insolvency-specific considerations, well-suited to address Canadian recognition of a foreign Plan and Sanction Order under appeal. Accordingly, this article provides an overview of the analysis that Canadian courts should apply when asked to recognize a Plan and Sanction Order in this scenario.

The Arrowmaster framework²

The legal framework for Canadian recognition of a foreign Plan and Sanction Order under appeal in the foreign jurisdiction can be derived from the analysis that Canadian courts undertake when a party seeks enforcement of a foreign judgement or arbitral award in similar circumstances.

That analysis was well-articulated by Justice MacPherson for the Ontario Court of Justice in Arrowmaster Inc. v. Unique Forming Ltd. [Arrowmaster]³. In that case, the plaintiff sought enforcement, by way of a motion for summary judgement, of a foreign damages award that was under appeal in the foreign jurisdiction. The defendant, by contrast, sought an order staying the plaintiff’s motion for summary judgement and, in the alternative, an order staying execution of the award pending the outcome of the foreign appeal.

In assessing these competing requests, Justice MacPherson applied a two-step analysis: First, he determined whether the plaintiff was entitled to summary judgement at the time he heard the matter in Canada; and, second, finding that the plaintiff was so entitled, he determined whether it was appropriate to stay execution of the award pending the outcome of the foreign appeal. Justice MacPherson ultimately granted the relief sought by both parties—the plaintiff was entitled to enforce its judgement, but execution of the judgement was stayed pending the appeal.

Interestingly, in reviewing the caselaw on the enforcement of foreign judgements by way of summary judgement, Justice MacPherson found the test for same (i.e., the first step of his analysis) to be unaffected by the pending foreign appeal, and instead confined his substantive consideration of the appeal, and its potential impact on the parties, to the second step of his analysis. In other words, the appeal’s existence did not affect the plaintiff’s entitlement to have its award enforced in Canada; rather, it justified delaying execution to give the foreign appellate court time to render its decision.

Turning to Canadian recognition of a foreign Plan and Sanction Order under appeal, the Arrowmaster analysis can be reformulated as follows:

1. Is the debtor entitled to recognition of the Plan and Sanction Order now?
2. If it is, should the effectiveness of that recognition be stayed until the foreign appellate court has rendered its decision?

Both of these steps are discussed in turn.

Step 1: Should the court recognize the Plan and Sanction Order?

Starting with step one, this article proposes that the court should first assess whether it is appropriate in the circumstances to recognize the Plan and Sanction Order in Canada without reference to the pending foreign appeal. That is, as was the case in Arrowmaster, consideration of the foreign appeal and its potential impact on the parties is better captured as its own separate step.

Arrowmaster noted that the test for enforcement of a foreign judgement requires, among other things, that the judgment be final and res judicata in the foreign jurisdiction, which occurs when the court that rendered the judgement no longer has the power to rescind or vary it. The determination of “finality” is not altered by reason that the judgement is under appeal⁴.

Indeed, whether a given issue has or has not been appealed has no bearing on the terms of the Plan and Sanction Order or what they purport to do—they are identical instruments in both scenarios. That is not to say the issues with the Plan and Sanction Order raised by the opposing stakeholder’s appeal have no bearing on whether Canadian recognition is appropriate. Rather, those issues should be considered on their merits at step one, and not by virtue of the fact that they are part of the foreign appeal.

While the full legal analysis for Canadian recognition of a Plan and Sanction Order falls outside of the scope of this article, it is helpful to review the principles underlying Part IV of the CCAA and the Canadian court’s role in overseeing ancillary proceedings, because those principles factor into the second step of the analysis.

The primary purpose of Part IV of the CCAA is to facilitate cooperation between Canadian courts and the courts of foreign jurisdictions so that cross-border insolvencies can be administered in a fair and efficient manner that promotes legal certainty for trade and investment while protecting the interests of debtors, creditors and other interested persons⁵. The principle of comity underlies the Canadian courts’ role in giving effect to this purpose in ancillary proceedings.

In furtherance of this purpose, the CCAA allows Canadian courts to make any order, on terms and conditions it considers appropriate, for the protection of a debtor’s property or that is in the interest of creditors⁶. Once an order recognizing foreign proceedings is made, Canadian courts are required to cooperate, to the maximum extent possible, with the foreign representative and foreign court, subject to legal and equitable rules and public policy considerations⁷.

Having regard for these principles and relevant caselaw, the court will render its decision as to whether the Plan and Sanction Order should be recognized in Canada, notwithstanding the foreign appeal.

Step 2: Should recognition be stayed pending the foreign appeal?

If the court finds that Canadian recognition of the Plan and Sanction Order is appropriate in the circumstances, the analysis turns to the second step: whether effectiveness of the court’s recognition should be stayed pending the outcome of the foreign appeal.

Early judicial consideration of this step was provided by the 1924 case of Battle Creek Toasted Corn Flake Co. v. Kellogg Toasted Corn Flake Co. [Battle Creek]⁸, which distinguished between two scenarios. On the one hand, in the extreme case where refusal of a stay would render the appeal nugatory, the court reasoned that a stay should be granted outright in order to protect the opposing party’s right of appeal. On the other hand, where one or both of the parties might suffer inconvenience and/or substantial pecuniary loss, the court left room for judicial discretion.

However, it is unclear that this binary distinction is helpful in the context of a Plan and Sanction Order (nor is the “nugatory” factor often determinative in modern caselaw in the foreign judgement context). While the impact of the Canadian court’s stay on the foreign appeal may be considered in the analysis (see the discussion in factor 2, below), opposing parties would be handed extraordinary and disproportionate leverage over the outcome of cross-border restructurings if they could block the effectiveness of a Plan’s Canadian recognition simply by appealing a strategic issue. This article proposes that the impact of the stay on the foreign appeal should not necessarily be determinative, and instead a stay should remain a matter of judicial discretion in all circumstances⁹.

Accordingly, the test for whether a stay is appropriate in the circumstances, set out in Battle Creek and consistently applied by the Canadian jurisprudence, is whether, on a balance of convenience, the stay should be granted or refused¹⁰.

Subsequent judicial consideration has resulted in four factors that courts consider when weighing the balance of convenience in the enforcement context: (i) the bona fides and substance of the appeal; (ii) the prejudice or hardship to either party; (iii) the chronology and conduct of the parties in the foreign jurisdiction; and (iv) whether the opposing party should post security as a condition of the stay.

The potential application of those four factors in the context of a Plan and Sanction Order are discussed in turn.

Factor 1: Bona fides and substance of the appeal

The first factor in the balance of convenience analysis is the bona fides and substance of the appeal¹¹. In the context of enforcing a foreign judgement or arbitration award, the issue is often framed as whether the opposing party has demonstrated a “serious” or “genuine” issue to be tried in the appeal—a formulation derived from specific legal requirements in those circumstances (e.g., Rule 20 of the Ontario Rules of Civil Procedure)¹².

While there may be value in expressing this factor as a threshold issue in enforcement scenarios, it is not clear that courts should do so in the Plan and Sanction Order context. Justice MacPherson downplayed the significance of this factor in Arrowmaster, noting that it is simply not realistic, nor desirable, for a Canadian judge to interpret the terms of a commercial contract and analyze those terms under foreign laws¹³.

It is difficult to imagine a Canadian court performing such a review for a foreign Plan and Sanction Order. Commercial insolvencies can be incredibly complex, particularly when the foreign court enters its Sanction Order after an in-depth review of voluminous evidence, days (or weeks) of live witness testimony and/or a detailed application of those facts to a complicated, nuanced legal regime. It seems wholly unrealistic for a Canadian court to re-trace the foreign court’s steps and estimate the appeal’s merits, even on a cursory level.

These difficulties notwithstanding, there may be room for a Canadian court to focus on the scope of relief sought on the appeal and its potential impact on the Plan. If the issue on appeal is relatively narrow—for example, the allocation of a specific pool of cash among a creditor class with Canadian claimants—the Canadian court may have some flexibility to grant a partial stay tailored to that dispute. On the other hand, if the appeal touches on some fundamental element that underpins the Plan’s success, it may force a more rigid, all-or-nothing approach to the stay.

Factor 2: Hardship and prejudice to the parties

The next factor considered in the enforcement context is the hardship to, or the prejudice to be suffered by, the respective parties if a stay is granted or refused, including whether the result causes irreparable harm for either party¹⁴. The court’s objective with this factor is generally to determine which party would suffer greater prejudice, and thus in whose favour this moves the balance of convenience¹⁵. In the enforcement context, the most common forms of prejudice are, to the enforcing party, the delay in executing on its award and, to the opposing party, in paying an award that subsequently gets overturned in the foreign appeal (particularly where such payment affects its prospects in the appeal)¹⁶.

In the Part IV context, debtors generally start with an advantage on this factor. The Plan benefits not just the debtor, whose primary interest is often to move on with its business and emerge from the insolvency proceedings in as competitive a market position as possible, but also the myriad of creditors and other stakeholders that are set to receive value from the estate or from the debtor’s future operations. This factor may be impacted by the degree of creditor support for the Plan as reflected in the class vote results. The Plan, and the debtor’s long-term success, may also provide non-commercial benefits to the public¹⁷. Delaying the Plan’s effectiveness means delaying these benefits to the prejudice of those who would otherwise enjoy them.

The consequences of a delay are heightened when timely Canadian recognition is a condition precedent to the Plan’s effectiveness. Failure to grant such recognition may place the Plan, and the settlements and compromises that underpin it, into jeopardy, potentially destroying much of the value the Plan was designed to maximize. While the debtor and its key stakeholders may have room to waive such a condition, this risk nonetheless may be difficult to reconcile with the principles of comity and deference to the foreign court, which generally call for Canadian courts to assist with the orderly completion of the debtor’s restructuring process¹⁸.

However, this prejudice to the debtor and its stakeholders is greatly reduced when the debtor does not establish evidence of its intent to implement its Plan before the foreign appeal is resolved. If the debtor intends to take a “wait and see” approach, there may be little reason for the Canadian court not to do the same by staying its recognition pending the appeal.

On the other side of this balance is the prejudice that would be suffered by the opposing stakeholder if the Plan and Sanction Order were to be recognized in Canada without a stay. The strength of that prejudice is context-specific and depends on a variety of elements, but in all cases must be established with sufficient evidence—bald assertions of prejudice are unlikely to convince a court to delay recognition (a principle that also applies to the debtor)¹⁹. Enforcement or recognition must be more than a mere inconvenience or annoyance for the opposing stakeholder²⁰.

In assessing prejudice to the opposing stakeholder, the court should consider questions such as: Does Canadian recognition, and the Plan’s subsequent effectiveness, render the appeal nugatory²¹? Does the Plan foreclose avenues of recourse for the opposing stakeholder if its appeal succeeds? Would the Plan move the debtor’s Canadian resources outside of the reach of the Canadian court, forcing an opposing Canadian stakeholder to appear before the foreign court to seek redress if its appeal succeeds²²? Does the appellant represent the interests of one stakeholder, or rather a large bloc of stakeholders, the collective prejudice to whom accumulates into something substantial?

Factor 3: Chronology and conduct of the parties in the foreign plenary proceedings

The third factor is the chronology of, and the conduct of the parties in, the litigation in the foreign jurisdiction, especially with respect to the appeal component²³. Here, the court primarily seeks to determine whether the opposing stakeholder is serious about its appeal and making good faith, diligent efforts to resolve the matter in the foreign jurisdiction. Enforcement of foreign decisions is not a place to “rag the puck,” and the Canadian court must protect its own process²⁴.

Canadian courts have grappled with a range of conduct in this context, spanning from alacrity to obstructiveness. For example, Justice MacPherson found in Arrowmaster that the opposing party had attorned to the jurisdiction of the foreign trial court, defended fully and fairly without any delay in that court and appealed the decision promptly, all of which weighed in favour of a stay²⁵. By contrast, the opposing party’s attempt to stay enforcement of a foreign judgement in Van Damme v. Gelber was his sixth attempt to re-open the matter and contest the findings of the foreign court; while the court did grant what it hoped to be a “short stay,” it noted that it had “considerable misgivings” about doing so²⁶.

The court also considers the estimated time to a final resolution in the appeal process. This element informs the prejudice and hardship factor: the longer the party seeking enforcement must wait for a decision from the appellate court, the greater the prejudice to that party. For example, in Arrowmaster, the foreign appellate court had already heard the parties’ submissions and reserved its decision, which was expected within four to six months²⁷. This delay was short enough to permit a stay. On the other hand, the path to success for the opposing party in HSBC Bank USA v. Subramanian was lengthy and complex, requiring a subsequent full contested hearing on the merits²⁸. In those circumstances, enforcement was granted without a stay.

Finally, Canadian courts consider whether the foreign court has already refused to stay or set aside the judgement at first instance.²⁹. In granting recognition of the Plan and Confirmation Order without a stay in Re Mallinckrodt Canada ULC, the Ontario Court noted that the U.S. Bankruptcy Court had already dismissed the motions of two U.S. creditors to stay the Confirmation Order pending their respective appeals³⁰. Likewise, the Ontario Court of Appeal in HSBC Bank USA v. Subramanian held that the lower court’s decision to grant enforcement without a stay was made “even stronger” by an update that the U.S. court had refused to grant a stay of its order at first instance³¹. Without specific Canadian considerations to justify a Canadian stay where a foreign stay was rejected, a Canadian stay appears to be inconsistent with the decision in the plenary proceedings—a result that comity tends to discourage³².

In the Part IV context, Canadian courts must ensure that parties come to court with clean hands and not use the Canadian proceedings as a means to obstruct or delay an unfavourable outcome. The court should ask: Has the opposing stakeholder been diligently prosecuting its appeal in the foreign jurisdiction? Is the opposing stakeholder seeking, or has it sought, a stay of the Plan and Sanction Order in the foreign court at first instance? Did the opposing stakeholder raise all of its issues in the foreign plenary proceedings that are now before the Canadian court? How long will the foreign appellate court take to render its decision? Is it reasonable for the debtor and other stakeholders to wait that long for the Plan to be recognized and/or to become effective?

Factor 4: Should appropriate security be granted?

The final factor in the balance of convenience analysis is whether there is room for the court to order the opposing stakeholder to post appropriate security as a condition of the stay. The court might permit the enforcing party to make use of those funds in the interim, provided that it pays back all drawn amounts, plus interest, if the appeal succeeds (and perhaps itself post security to guarantee that payment)³³.

As a starting point, some commentary argues that, in the context of enforcing a foreign arbitration award, it is most consistent with the principles of comity that full security be posted (i.e., to facilitate enforcement) and, accordingly, that the onus should fall on the party resisting enforcement to show why security in the full amount of the award, plus costs and interest, should not be ordered³⁴.

Security serves three objectives in the enforcement context: (i) it compensates the enforcing party for the potential prejudice it suffers by the delay (which may include the risk that the opposing creditor take steps to shelter its assets from the enforcing party); (ii) it facilitates execution of the foreign judgement; and (iii) it indicates the bona fide intentions of the opposing stakeholder to undertake diligent prosecution of the appeal in the foreign court³⁵.

However, these objectives are not absolute. The court in Wires Jolley LLP v. Jean Estate held that parties seeking enforcement do not need to establish that failure to post security will imperil the value of the award³⁶. A court might also be reluctant to order security where it would prejudice the foreign appeal³⁷. Additionally, where posting the full quantum of the award would cause financial difficulty for the opposing party, the court may exercise its discretion to order some other “appropriate” amount. This was the outcome in Empresa Minera Los Quenuales S.A. v. Vena Resources Inc., where the court ordered the opposing party to post security of approximately 10% of the full award³⁸.

Moving to the Plan and Sanction Order context, the first objective of compensating for prejudice raises an issue: What, exactly, is the security meant to compensate? Foreign awards almost universally contain a specific obligation to secure (i.e., the amount of the award, plus interest). Contrast this to foreign Plans, which generally provide for payments by the debtor to its creditors—not the other way around.

One potential obligation may be payment of the legal and/or professional fees of the debtor if the appeal is unsuccessful (and, perhaps, those of the other supportive stakeholders fighting the appeal). If not the full amount of those fees, some smaller partial amount may be appropriate. Depending on the scope and scale of those fees, securing such amounts in full might impose significant financial hardship on the opposing party. Large restructurings can incur fees on a scale of hundreds of thousands of dollars per day for all of the parties involved: prohibitive for all but the biggest stakeholders. Such a financial burden might also imperil the success of the appeal.

The court might also order security to compensate creditors for the prejudice of having to wait for a distribution while the Plan is stayed in Canada. In the event that the Canadian court orders a stay and the debtor decides (or is required) to wait for the appeal’s conclusion before giving effect to the Plan, the opposing stakeholder could be ordered to post security in an amount equal to the interest that would be earned on the delayed payments to creditors until the appeal is resolved. Such amounts would be added to the Plan’s distribution if the appeal fails. While such security would not fully satisfy the second objective of facilitating the foreign Plan and Sanction Order, it would nonetheless bring creditors closer to the position they would have been in had the Plan been recognized in Canada and implemented on its terms. However, such security could cause unacceptable financial hardship for the opposing stakeholder if the distributions were particularly large; instead, a partial amount might be appropriate.

In both scenarios outlined above, and, indeed, on any basis for ordering security, security advances the final objective of ensuring the opposing stakeholder’s bona fide intentions to pursue its appeal quickly and diligently in the foreign court. Insolvency matters commonly contain moral hazards, because stakeholders often face minimal downside risk in challenging or appealing a Plan—particularly where it provides them with small or nil recoveries. In requiring the opposing party to post funds upfront to secure the debtor’s fees or to compensate creditors for having to wait for a distribution, the court helps ensure that the opposing stakeholder bears risks that are proportionate to those faced by the debtor and other creditors.

Conclusion

When both steps of the Arrowmaster framework are applied in the Part IV context, the analysis yields one of three outcomes. Either: (i) the Plan and Sanction Order will not be recognized; (ii) the Plan and Sanction Order will be recognized immediately without a stay; or (iii) the Plan and Sanction Order will be recognized, but effectiveness of that recognition will be stayed, in full or in part, pending the foreign appeal.

Of these three outcomes, the above discussion indicates that the third outcome is less likely to occur than the other two. This is because, in applying the four stay factors to the Part IV context, it becomes clear that opposing stakeholders face an uphill battle when attempting to challenge Canadian recognition of a Plan and Sanction Order on the basis of their foreign appeals.

At a high level, this result makes sense: cross-border insolvencies attempt to weigh the interests of many individuals and entities—sometimes thousands or more. To give the interests of one dissatisfied stakeholder enough weight to delay Canadian recognition or effectiveness of a Plan that has otherwise overcome a creditor vote and foreign court’s sanction should require some extraordinary, persuasive and Canadian-centric circumstances. Especially given that the Canadian court’s role in overseeing ancillary proceedings is largely restrained by comity and deference to the foreign court.

That being said, this legal landscape has negative implications for access to justice in insolvency matters. A smaller stakeholder (an individual, say) has considerable disadvantages on the four stay factors as compared to a significant creditor, which may hold much larger claims and have virtually unlimited resources to fight the Plan (and to post security).

With the balance of convenience analysis in mind, opposing stakeholders should take appropriate steps to ensure that they appear before the Canadian court in the best possible position to challenge recognition of the Plan and Sanction Order. They should raise each of their issues in the foreign plenary proceedings at first instance and diligently pursue their appeal and all available remedies in the foreign jurisdiction (e.g., by seeking a stay before the foreign court at first instance). They might also find strength in numbers by obtaining the support of other similarly situated stakeholders. Finally, they should approach their opposition through a solutions-oriented lens by providing the court with sensible options that are tailored to the circumstances, likely to satisfy the balance of convenience test and minimize the prejudice suffered by the debtor and its other stakeholders.

 
Mike would like to thank Scott Bomhof for his assistance and guidance with this article.