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Cour File Number:
iL__i
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL FOR ONTARO)
IN THE MATTER OF THE COMPANIES' CREDITORSARRNGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF THE BANKRUPTCY ANDINSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED
AND IN THE MATTER OFA PLAN OF COMPROMISE ORARRGEMENT OF SMURFIT -STONE CONTAINER
CANADA INC. AND THE OTHER APPLICANTS LISTED ONSCHEDULE "A"
Respondents
APPLICATION RECORDOF THE APPLICANTS, AURLIUS CAPITAL MAAGEMENT, LP
and COLUMBUS IDLL MANAGEMENT L.P.(together, the "Fund Ma.nagers")
(Filed Pursuant to Section 40 of the Supreme Court Act and Rule 25(1)(a)of the Rules of the Supreme Court of Canada)
VOLUM IPAGES 1 to 195
FRASER MILNER CASGRA LLPBarsters and Solicitors1 First Canadian Place100 King Street WestToronto ON M5X 1B2Facsimile: 416-863-4592
Neil S. RabinovitchTel: 416-863-4656
E-Mail: neil.rabinovitch~fmc-Iaw.com
Jane O. Dietrich
Tel: 416-863-4467
E-Mail: jane.dietrich~fmc-Iaw.com
Lawyers for the Applicants, AurelliusCapital Management, LP and Columbus
. Hil Capital Management, L.P.56610665JDoe
FRASER MILNER CASGRA LLPBarsters and SolicitorsSuite 142099 Ban StreetOttawa, ON KIP IH4Facsimile: 613-783-9690
K. Scott McLeanTel: 613-783-9665Email: scott.mclean~fmc-Iaw.com
Corey A. Vileneuve (Law Clerk)Tel: 613-783-9699Email: corey.vileneuve~fmc-Iaw.com
Ottawa Agents forthe Applicants, AurellusCapital Management, LP and Columbus HilCapital Management, L.P.
2
ORIGINAL TO: THE REGISTRAR
COPIES TO: STIKEMAN ELLIOT LLP5300 Commerce Cour West199 Bay StreetToronto, ON M5L IB9
Sean DunphyTel: 416-869-5662
Fax: 416-947-0866
E-mail:sdunphy(ßstikeman.com
Alexander RoseTel: (416) 869-5261
Fax: 416-947-0866
E-mail: arose(ßstikeman. com
Lawyers for Smurt-Stone Container Canada Inc.and the other Applicants Listed on Schedule A
AN TO: GOODMAS LLP333 Bay StreetSuite 3400Toronto, Ontaro M5H 2S7
Rob ChadwickTel: 416-979-2211
Fax: 416-979-1234
E-mail:rchadwick(ßgoodmans.ca
Chris ArmstrongTel: 416-979-2211
Fax: 416-979-1234
E-mail:carstrong(ßgoodmans.ca
Lawyers for Deloitte & Touche Inc.
56610665JDoe
AND TO:
AND TO:
56610665JDoe
3
BENNTT JONES LLP3400 One First Canadian PlaceP.O. Box 130Toronto ON M5X 1A4
Kevin ZychTel: 4l6-777-5738
Fax: 416-863-1716
E-mail:zychk(ßbennettjones.com
S. Richard OrzTel: 416-777-5737
Fax: 416-863-1716
E-mail:orzvr(ßbennettjones.com
Derek FruehTel: 416-777.6237
Fax: 416-863-1716
E-mail:frehd(ßbennetijones.com
Raj SahniTel: 416-777-4804
Fax: 416-863-1716
E-mail: sahr(ibennettj ones. com
Lawyers for Offcial Committee of Unsecured Creditors of Smurfit-StoneContainer Corporation, et al
THORNTON GROUT FINNGAN LLPSuite 3200, Canadian Pacific Tower100 Wellington St. West, P.O. Box 329Toronto-Dominion CentreToronto ON M5K 1K7
Robert I. ThorntonTel: 416-304-0560
Fax: 416-304-1313
E-mail:rtomton(itgf.ca
Seema AggarwalTel: 416-304-0603
Fax: 416-304-1313
E-mail:saggarwal(itgf.ca
Lawyers for the Indentue Trustee
4
SCHEDULE "A"
Smurfit-Stone Container Canada Inc.
3083527 Nova Scotia Company
MBI LimitedlLimitée
639647 British Columbia Ltd.
B.C. Shipper Supplies Ltd.
Specialty Containers Inc.
605681 N.B. Inc.
Francobec Company
Stone Container Finance Company of Canada II
56610665JDoe
n ex
Cour File Number:
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL FOR ONTARO)
IN THE MATTER OF THE COMPANIES' CREDITORSARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMNDED
AND IN THE MATTER OF THE BANKRUPTCY ANDINSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE ORARGEMENT OF SMUIT-STONE CONTAINER
CANADA INC. AND THE OTHER APPLICANTS LISTED ONSCHEDULE "A"
Respondents
APPLICATION FOR LEAVE TO APPEAL - TABLE OF CONTENTS
Tab Document Pages
1 Notice of Application for Leave to Appeal 1-12
2 Affdavit of Allyson Roy sworn April 8, 2010 13-17
A Exhbit "A" - CCAA Records from the website of the Offce of the 18-26Superintendent of Banptcy Canada
B Exhbit "B" - Aricle by Jans Sara, "Corporate Group Insolvencies: 27-52Seeing the Forest and the Trees" (2008) ICC-ART 2008-6 (W.L.).
C Exhbit "C" - Anotated Provisional Agenda for the Thrt-First Session 53-58ofUNCITRA Working Group V (Insolvency Law)
D Exhibit "D" - Anotated Provisional Agenda for the Thirt-Eight Session 59-65ofUNCITRA Working Group V (Insolvency Law)
56609575JDoe
11.
Tab Document Pages
E Exhbit "E" - Draft Recommendations on the Treatment of Enterprise 66-127Groups in Insolvency from the Thirt-Seventh Session ofUNCITRAWorking Group V (Insolvency Law)
3 Certificate of Counsel for the Applicants, Aurelius Capital Management, 128-131LP and Columbus Hil Capital Management, L.P.
4 Order of the Honourable Madam Justice Pepall made on December 11, 132-1362009 with respect to the motion brought by Aurelius CapitalManagement, LP and Columbus Hil Capital Management, L.P. withreasons to follow (the "December 11 th Order")
5 Order of the Honourable Madam Justice Pepall made on Januar 28,2010 137-141with respect to the motion brought by the Applicants in the CCAAProceedings (the "Januar 28th Order")
6 Reasons for Decisions of the Honourable Madam Justice Pepall dated 142-163Januar 28, 2010 with respect to the December 11 th Order and the Januar28th Order
7 Endorsement of the Ontaro Cour of Appeal with respect to the 164-165December 11 th Order application for leave to appeal to the Ontaro Courof Appeal dated March 9, 2010
8 Endorsement of the Ontario Cour of Appeal with respect to the Januar 166-16728th Order application for leave to appeal to the Ontaro Cour of Appealdated March 9,2010
9 Memorandum of Arguent of Aurelius Capital Management, LP and 168-195Columbus Hil Capital Management, L.P.
10 Affdavit of Dan Gropper sworn September 14, 2009 ("Gropper 196-207Affidavit")
A Exhbit "A" to the Gropper Affidavit - Simplified Corporate Char 208-209showig Enterprises, Finance II and Smurt Canada
B Exhbit "C" to the Gropper Affidavit - Schedule of Assets and Liabilties 210-266and Statement of Financial Affairs of Finance II
11 Affdavit of Dean Jones sworn September 21,2009 ("Jones Afdavit") 267-273
A Exhibit "A" to the Jones Affdavit - Afdavit of Dean Jones sworn 274-322Januar 25,2009 without exhbits
56609575_I.DOe
111.
Tab Document Pages
B Exhbit "E" to the Jones Affdavit - Loan Agreement dated July 20, 2004 323-330
12 Endorsement of the Honourable Madam Justice Pepall dated October 20, 331-3392009
13 Affdavit of Melissa paz sworn December 2, 2009 ("paz Affidavit") 340-345
A Excerpt from Exhbit "H" to the paz Affdavit - Offering Memorandum 346-348
14 Affdavit of Douglas R. A. McFadyen sworn December 8, 2009 349-353
15 Afdavit of Malcolm M. Mercer sworn December 9, 2009 354-361
16 Transcript Brief - Cross-Examination of Melissa paz on December 9, 362-3712009
17 Notice of Motion of the Applicants retuable December 11,2009 372-379
56609575_I.DOe
1Cour File Number:
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL FOR ONTARO)
IN THE MATTER OF THE COMPANIES' CREDITORSARRNGEMENT ACT, RS.C. 1985, c. C-36, AS AMENDED
AN IN THE MATTER OF THE BANKRUPTCY ANDINSOLVENCY ACT, RS.C. 1985, c. B-3, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE ORARGEMENT OF SMURFIT-STONE CONTAINER
CANADA INC. AND THE OTHER APPLICANTS LISTED ONSCHEDULE "A"
Respondents
NOTICE OF APPLICATION FOR LEAVE TO APPEALOF THE APPLICANTS, AURELIUS CAPITAL MANAGEMENT, LP
and COLUMUS IDLL MAAGEMENT L.P.(together, the "Fund Managers")
(Filed Pursuant to Subsection 40(1) of the Supreme Court Act and Rule 25(1)(a)of the Rules of the Supreme Court of Canada)
". .
TAKE NOTICE that the Fund Managers hereby apply for leave to appeal to the Cour pursuantto subsection 40(1) of the Supreme Court Act, RS.C. 1985, c. S-26, as amended and rule25(1)(a) of the Rules of the Supreme Court of Canada, from the Orders of the Cour of Appeal
for Ontario in cour of appeal fie nos. M38445 and M38502 made March 9, 2010, in respect ofOrders made by the Ontario Superior Cour of Justice in cour file no. CV -09-7966 on December11,2009 and January 28, 2010, for its costs of this application and for any furter or other orderthat the Cour may deem appropriate;
AND FURTHER TAK NOTICE that ths application for leave is made on the followinggrounds:
Nature of the CCAA Proceedings and the Procedural History Leading to this Application
1. Stone Container Finance Company of Canada II ("Finance II") and Smurt-Stone
Container Canada Inc. ("Smurft Canada") are applicants in proceedings under the Companies'
Creditors Arrangement Act, RS.C. 1985, c. C-36, bearing Ontaro Cour File no. CV -09-7966
56592730JDoe
22
(the "CCAA Proceedings") and debtors in related proceedings under Chapter 11 of Title 11 of
The United States Banptcy Code (the "US Proceedings").
2. Finance II issued certain 7 3/8% Senior Notes due July 15, 2014 (the "Notes") pursuant
to an indentue dated as of July 20, 2004. The Applicants for leave to appeal, Aurelius Capital
Management, LP and Columbus Hil Capital Management, L.P. (the "Fund Managers"),
manage fuds that hold a majority of the Notes.
3. Finance II loaned the US$200 milion proceeds from issuance of the Notes to Smurfit
Canada (the "Intercompany Loan") under a loan agreement dated July 20, 2004 (the "Loan
Agreement"). The Loan Agreement is governed by Quebec Law.
4. The CCAA Applicants commenced a motion within the CCAA Proceedings for a
determination by the CCAA cour as to whether Finance II's claim (the "Intercompany Claim")
against Smurt Canada under the Loan Agreement should properly be characterized as an equity
clai or a debt claim (the "Characterization Issue").
5. Prior to raising this issue, the CCAA Applicants had always treated the Intercompany
Loan as debt. However, the CCAA Applicants then took the position that the Intercompany
Loan was extinguished or converted into equity upon insolvency of Smurfit Canada.
6. All of Finance II's directors are directors or offcers of Smurfit Canada.
7. The interests of Finance II are directly adverse to those of Smurt Canada and the other
applicants in the CCAA Proceedings (the "CCAA Applicants") with respect to recovery on all
of Finance II's disclosed assets, including the Intercompany Loan.
56592730JDoe
33
8. Finance II and Smurfit Canada are represented by the same counsel in the CCAA
proceedings. Finance II and Smurfit Canada's counsel also acted as counsel on the Finance II
and predecessor Finance I loan transactions.
9. There is no evidence that Finance II's directors have received independent legal advice,
including with respect to the matters in ths proceeding. There is also no evidence that the
directors have considered whether they and their counsel are conflcted or whether the positions
being taken in the CCAA proceedings are in the best interests of Finance II.
10. Immediately prior to the retu of the motion to determine the Characterization Issue (the
"Characterization Motion"), the Fund Managers brought a cross-motion, based on the
developing record with respect to the conficts of the directors of Finance II and the conficts of
Finance II's counsel and the refusal to produce relevant information and witnesses, requesting
among other thngs that:
(a) the motions' judge appoint independent counsel for Finance II, including for the
puroses of the hearng of the Characterization Motion; and
(b) the motions' judge adjourn the Characterization Motion to permit new counsel for
Finance II to prepare for that motion and to consider whether the motion should
proceed by way of a j oint hearing with the US Banptcy Court.
11. On December 11, 2009, the motions' judge dismissed the cross-motion with reasons to
follow (the "Representation Order") and allowed the Characterization Motion to continue.
56592730_2.Doe
4 4
12. As a result, the Characterization Motion proceeded with the same counsel acting for the
legal and economic .interests of Smurt Canada and against the legal and economic interests of
Finance II.
13. On Januar 28, 2010, the motions' judge also released reasons for her decision on the
Characterization Motion where she found that (the "Characterization Order"):
(a) the Intercompany Loan claim was debt (and not equity), but was not a debt
provable in banptcy; and alternatively,
(b) the Intercompany Loan claim did not ran pari passu with the unsecured creditors
of Smurfit Canada and had a value of zero.
14. The Fund Managers brought a motion to the Cour of Appeal for Ontario for leave to
appeal the Representation Order and argued that the motions' judge erred in law by:
(a) failing to appoint independent counsel for Finance II in the CCAA Proceedings
and the Characterization Motion, and in so doing, failed to follow well-
established standards concernng conficts of interest when a lawyer represents
clients whose interests are adverse;
(b) holding that the Fund Managers' counsel could represent the interests of Finance
II at the Characterization Motion without the Fund Managers' counsel having the
benefit of a solicitor-client relationship; and
(c) allowing Stikemans to act as gatekeeper of the information available to the Fund
Managers in the CCAA Proceedings and the Characterization Motion, in the face
56592730_2.Doe
55
of these conficts, which resulted in material evidence relating to the Finance I
loan transaction being witheld.
15. The Fund Managers brought a second motion to the Cour of Appeal for Ontario for leave
to appeal the Characterization Order 1 and argued, inter alia, that the motions' judge erred in law
by:
(a) applying common law principles of contractual interpretation in the face of a loan
agreement that is governed by the laws of Quebec which requires the principles of
contractual interpretation under the Civil Code of Quebec S.Q. 1991, c. 64
("CCQ") to be applied, and finding that:
(i) the Intercompany Loan was not recoverable by legal process and was
therefore not a debt provable in banptcy;
(ii) Finance II's claim should not ran pari passu with the unsecured debt
claims against Smurt Canada; and
(iii) the paries to the Loan Agreement contemplated that in an insolvency
proceeding the value of Finance II's claim would be zero.
16. On March 9, 2010, the Cour of Appeal for Ontaro dismissed the Fund Managers'
motions for leave to appeaL. As is the practice on such leave applications, no reasons were
released.
1 The motions for leave to appeal the Representation and Characterization Orders were brought separately due to the
earlier date that the Representation Order was made and the limitation period for bringing motions for leave undersection 14(2) of the CCAA.56592730_2.Doe
66
The Issues of Public and National Importance Justifying Review by this Court
17. The CCAA is federal legislation that applies thoughout Canada. Proceedings under the
CCAA often involve an international dimension. Many cases, such as this one, have companion
proceedings in the US under Chapter 11 of the US Bankruptcy Act.
18. Outside of the CCAA context, the jurisprudence of this Court and international precedent
have established clear national and international standards for dealing with conflicts of interest
for directors and lawyers.
19. In US cases under the US Banptcy Act, the US court has taken a strict approach to
conficts of interest in cases where the debtors seek the cour's assistance in adjudicating
intercompany disputes.
20. The international reputation of Canada's administration of justice requires that Canada
adhere to certain minum standards for addressing conflcts of interest while resolving
intercompany claims. It is important that there be clear national standards for dealing with
conficts of interest durg CCAA proceedings.
21. Faced with the diffcult position of having to assert claims against other companes of
which they are also directors, it is unealistic to expect those conficted directors to be able to
fulfill their fiduciar obligations to each of the corporations they serve.
22. Having an independent fiduciar (whether a cour-appointed litigation representative,
independent counsel, an independent director, or an independent monitor) is critical to the proper
administration of justice. A company that does not share a common legal and economic interest
with the other entities in CCAA proceedings should have some level of independent
56592730_2.Doe
7 7
representation to ensure that the intercompany claim is appropriately preserved, protected and
pursued.
23. The deleterious effects of failing to have some independent fiduciar In this case
manfested themselves as follows:
(a) The Fund Managers, who were forced into the position of arguing the position of
Finance II, were deprived of access to relevant information, including the file
relating to the "Finance I" transaction on which the Finance II Intercompany Loan
was copied, even though the witnesses proffered on behalf of Smurfit Canada and
Finance II described the Finance II Loan Agreement as a "cookie cutter" copy of
the Finance I transaction, with only the quantu, interest rate and matuity date
being changed.
(b) The Fund Managers were denied access to interviews with Finance II
representatives including offcers, directors and former employees.
(c) The Fund Managers were forced to interview or cross-examine witnesses
(including directors of Finance II) under the watchful eye of counsel for the
Applicants, who refused numerous questions that ought to have been answered
and denied access to relevant information, documents and witnesses (such as
lawyers and accountants) to which Finance II would have been entitled if it had
been permitted to argue this motion itself with the benefit of independent
representation.
56592730JDoe
88
(d) Even though, Finance II had a fudamental right to have its dispute with Smurfit
Canada determined on the basis of Québec law based on the Loan Agreement,
counsel for the CCAA Applicants failed to prove Québec law.
(e) Under the CCQ, the interpretative task is to consider the tre common intentions
of the paries (volonté réelle). An independent fiduciar of Finance II could have
waived the right to Québec law on behalf of Finance II. However, in this case,
Finance II's counsel gave the very advice that would have been in issue as par of
determining the volonté réelle.
24. It was unown whether the information contained in Finance II's counsel's fies would
have been of assistance to Finance II because Finance II's counsel refused to produce or permit
the production of anything (tax, legal, accounting and other fies or reports) relating to the
Finance I transaction and refused to identify or provide access to interview or examine
individuals with knowledge of that transaction, including counsel, employees and accountants.
25. However, as a result of a production order made in the Chapter 11 proceedings additional
documents were subsequently produced which demonstrated that the position being advocated
by the CCAA Applicants ran contrar to the opinion given by Finance II's counsel in the Finance
I transaction.
26. The Fund Managers seek costs of this application for leave to appeaL.
56592730_2.Doe
9 9
tLDated at Toronto, Ontaro this "' day of April, 2010.
SIGNED BY
J) ei¡! Q~'r \.,, \,'f LJ (¿tl-"Lawyers for the Applicants
FRASER MILNER CAS GRAN LLPBaristers and Solicitors1 First Canadian Place100 King Street WestToronto ON M5X IB2Facsimile: 416-863-4592
Neil S. RabinovitchTel: 416-863-4656
E-Mail: neiLrabinovitch(ifmc-law.com
Jane O. Dietrich
Tel: 416-863-4467E-Mail: jane.dietrch(ifmc-Iaw.com
Lawyers for the Applicants, AurellusCapital Management, LP and ColumbusHil Capital Management, L.P.
J)~'~~\-or " Agent
FRASER MILNER CAS GRAIN LLPBaristers and SolicitorsSuite 142099 Ban StreetOttawa, ON KIP IH4Facsimile: 613-783-9690
K. Scott McLeanTel: 613-783-9665Email: scott.mclean~fmc-Iaw.com
Corey A. Vileneuve (Law Clerk)Tel: 613-783-9699Email: corey.vileneuve~fmc-Iaw.com
Ottawa Agents for the Applicants, AurellusCapital Management, LP and Columbus HilCapital Management, L.P.
ORIGINAL TO: THE REGISTRA
STIKEMA ELLIOT LLP5300 Commerce Cour West
COPIES TO: 199 Bay StreetToronto, ON M5L IB9
Sean DunphyTel: 416-869-5662
Fax: 416-947-0866
E-mail:sdunphy(istikeman.com
Alexander RoseTel: (416) 869-5261
Fax: 416-947-0866
E-mail:arose(istikeman.com
Lawyers for Smurt-Stone Container Canada Inc.and the other Applicants Listed on Schedule A
56592730_2.Doe
10
56592730JDoe
AND TO:
AND TO:
10
GOODMAS LLP333 Bay StreetSuite 3400Toronto, Ontaro M5H 2S7
Rob ChadwickTel: 416-979-2211
Fax: 416-979-1234
E-mail:rchadwick(igoodmans.ca
Chris ArmstrongTel: 416-979-2211
Fax: 416-979-1234
E-mail:carstrong(igoodmans.ca
Lawyers for Deloitte & Touche Inc.
BENNETT JONES LLP3400 One First Canadian PlaceP.O. Box 130Toronto ON M5X lA4
Kevin ZychTel: 416-777-5738
Fax: 416-863-1716
E-mail:zychk(ibennettjones.com
S. Richard OrzTel: 416-777-5737
Fax: 416-863-1716
E-mail:orzyrCIbennettjones.com
Derek FruehTel: 416-777.6237
Fax: 416-863-1716
E-mail:fruehd(ibennetijones.com
Raj Sahni
Tel: 416-777-4804
Fax: 416-863-1716
E-mail: sahr(ibennettj ones.com
Lawyers for Official Committee of UnsecuredCreditors of Smurfit-Stone ContainerCorporation, et al
1111
AND TO: THORNTON GROUT FINNIGAN LLPSuite 3200, Canadian Pacific Tower100 Wellngton St. West, P.O. Box 329Toronto-Dominion CentreToronto ON M5K lK7
Robert I. ThorntonTel: 416-304-0560
Fax: 416-304-1313
E-mail:rthomton(ßtgfca
Seema AggarwalTel: 416-304-0603
Fax: 416-304-1313
E-mail: saggaral!ßtgfca
Lawyers for the Indentue Trustee
SCHEDULE "A"
Smurfit-Stone Container Canada Inc.
3083527 Nova Scotia Company
MBI Limited.imitée
639647 British Columbia Ltd.
B.C. Shipper Supplies Ltd.
Specialty Contaiers Inc.
605681 N.B. Inc.
Francobec Company
Stone Container Finance Company of Canada II
NOTICE TO THE RESPONDENT: A respondent may serve and fie a memorandum in responseto ths application for leave to appeal within 30 days after service of the application. If noresponse is filed withn that time, the Registrar will submit ths application for leave to appeal to
the Cour for consideration pursuant to section 43 of the Supreme Court Act.
"', .
56592730_2.Doe
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5661
0665
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13
File No.
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL FOR ONTARO)
IN THE MATTER OF THE COMPANIES' CREDITORSARRANGEMENT ACT, RS.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF THE BANKRUPTCY ANDINSOLVENCY ACT, RS.C. 1985, c. B-3, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE ORARGEMENT OF SMUIT-STONE CONTAINR
CANADA INC. AND THE OTHER APPLICANTS LISTED ONSCHEDULE "A"
Respondents
AFFIDAVIT OF ALLYSON ROYFILED BY THE APPLICANTS, AURLIUS CAPITAL MANAGEMENT, LP
and COLUMBUS IDLL MAAGEMENT L.P.(Sworn April 8, 2010)
I, ALLYS ON ROY, of the City of Toronto, MAKE OATH AND SAY:
1. I am a student-at-Iaw at Fraser Milner Casgrain LLP, lawyers for the Applicants,
and as such, have knowledge of the matters to which I hereinafter depose.
CCAA Cases Involving More Than One Applicant
2. Since September 18, 2009, the Office of the Superintendent of Banptcy
Canada ("OSB") has kept a public record of certain information relating to proceedings
under the CCAA (the "CCAA Records") in accordance with section 26 of the !
Companies' Creditors Arrangement Act ("CCAA").
14 2.3. On April 7, 2010, I reviewed the CCAARecords which are
posted on the website
of the OSB (htt://ww.ic.gc.ca/eic/sitelbsf-osb.nsf/eng/home). A print out of this
website is attached as Exhbit "A" to this my Affidavit.
4. A review of the CCAA Records show that since September 18, 2009, there were
27 initial applications for protection made under the CCAA by debtor companies where
protection was granted. Of these 27 applications, 13 (or approximately 48%) involved
more than one applicant (i.e. a corporate group of some sense). As well, two applications
for recognition of foreign insolvency proceedings were made (both of which involved
more than one entity).
ImportancelPrevalence of Enterprise Groups in Insolvency Proceedings
5. The Insolvency Institute of Canada ("IIC") has recognized the prevalence of
insolvencies which involve multiple related entities and the corresponding unque and
important issues raised thereby. In her paper entitled "Corporate Group Insolvencies:
Seeing the Forest and the Trees" prepared for the IIC, Dr. Janis Sara1 has commentated
that "( c )orporate group financial distress poses unque challenges under insolvency and
banptcy law." A copy of ths publication has been attached hereto as Exhbit "B".
6. Internationally, the United Nations Commission on International Trade Law
("UNCITRA") has recognized that the insolvency of enterprise groups is a matter of
international importance that requires consideration.
1 Professor of Law at the University of British Columbia, Faculty of Law and Director of the National
Centre for Business Law
153.
7. In September 2006, the treatment of enterprise groups in insolvency was referred
to UNCITRA Working Group V (Insolvency Law) ("Working Group V") for
consideration, as is outlined in paragraph 9 of the Anotated Provisional Agenda for the
Thirt-First Session of Working Group V, a copy of which has been attached hereto as
Exhbit "C".
8. Publications by Working Group V indicate that Working Group V meets bi-
anually and is composed of the following States: Algeria, Arenia, Australia, Austria,
Bahain, Belars, Benin, Bolivia (plurinational State of), Bulgaria, Cameroon, Canada,
Chile, China, Colombia, Czech Republic, Ecuador, Egypt, EI Salvador, Fiji, France,
Gabon, Germany, Greece, Guatemala, Honduras, India, Iran (Islamic Republic of), Israel,
Italy, Japan, Kenya, Latvia, Lebanon, Madagascar, Malaysia, Malta, Mexico, Mongolia,
Morocco, Namibia, Nigeria, Norway, Pakstan, Paraguay, Poland, Republic of Korea,
Russian Federation, Senegal, Serbia, Singapore, South Africa, Spain, Sri Lana,
Switzerland, Thailand, Uganda, United Kingdom of Great Britain and Northern Ireland,
United States of America, Venezuela (Bolivarian Republic of) and Zimbabwe. A copy of
the Anotated Provisional Agenda for the Thrty-Eighth Session of Working Group V,
which sets out the composition of Working Group V at paragraph 1, is attached hereto as
Exhbit "D".
9. In consideration of the treatment of enterprise groups in insolvency, Working
Group V has recognized that, while it is important to have coordinated insolvency
proceedings, conficts of interest may arse and need to be addressed. Specifically,
paragraph 177 of the draft commentar and recommendations of par three of the
UNCITRAL Legislative Guide on Insolvency Law dated August 31, 2009, which is
164.
based on the Report of Working Group V from its thirt-sixth session in May 2009 and is
attached hereto as Exhbit "E", states the following:
Where a single or the same insolvency representative isappointed to administer several members of a group withcomplex financial and business relationships and differentgroups of creditors, there is the potential for loss ofneutrality and independence. Conficts of interest mayarise, for example, with respect to cross guarantees, intra-group claims and debts, post-commencement finance,lodging and verification of claims; or the wrongdoing byone group member with respect to another group member.The obligation to disclose potential or existing conficts ofinterest contained in recommendations 116 and 117 wouldbe relevant to the group context. As a safeguard against
possible conflcts, the insolvency representative could be
required to provide an undertakng or be subject to apractice rule or statutory obligation to seek direction fromthe cour. Additionally, the insolvency law could provide
for the appointment of one or more fuher insolvency
representatives to administer the entities in confict. That
appointment might relate to the specific area of confict,with the appointment being limited to its resolution, or bemore general and for the duration of the proceedings.
10. I make this Affdavit in support of the within application for leave to appeal the
judgment of the Ontario Cour of Appeal made March 9, 2010 refusing leave to appeal
from the Orders of Justice Pepall, dated December 11, 2009 and January 28, 2010, and
for no other or improper purose.
SWORN BEFORE ME at theCity of Toronto, ths 8th day of
April, 2010
~Commissioner for Takng Affdavits
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Douglas B. B. Stewart
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This is Exhibit "A" referred to inthe Affdavit of Allyson Roy swornbefore me ths 8th day of April,2010.~=s=
CONER, ETC.
Douglas B. B. Stewari
Office of the Superintendent of Banptcy Canada - CCAA Records Page 1 off
19
1+1 Offlce of 1he Superintendentof'Bankruptc Canada
Ni~'$niYQfIndua Ca
Bureu du surintendantdes faUites Canada Ca,. .' ...d....l...,;a aI,nQ~n"d'lndua1re Canada
Home ;: CCAA Records
CCAA Records
Below is a list of all companies that have been grantedprotection under the Companies' Creditors Arrangement Act(CCM) as of September 18, 2009. For details about aparticular record, click on the company name. Note: Newrecords will be posted within two business days of the initialCourt order.
For more information, either consult thepages for creditors or for monitors, orcontact the CCAA Team:
If you need additional information, contact the monitor forthat proceeding.
Telephone: 1-888-952-7137Fax: 1-877-827-7139Email: ccaalacc(âic.gc.ca
View by chronological order
or
Search by company name:
A I ß I ç I Q I ElF I G I til l I J I K I L I MIN 10 I P I Q I R I S III u I V I w I X I Y I z
View by chronological order
Bear Mountain Master Partnership et alMarch 25, 2010
Monitor: PricewaterhouseCoopers Inc.Representative: Christopher Stocco
1 -604-806- 7 1 631-604-806-7050 ext 4146http://www.pwc.com/ca/enIca r Ibea rm ou nta i nIl ndex.jhtm i
Cover-All Holding Corp. et alMarch 24, 2010
Monitor: Ernst & Young Inc.
Representative: Neil Narfason
403-206-5067www.ey.com/ca/cover-all
Nelson Financial Group Ltd.March 23, 2010
Monitor: A. John Page & Associates Inc.Representative: A. John Page416-364-4894www.ajohnpage.com/html/files.htm i
Atcon Construction Corporation Inc.March 2, 2010
Monitor: Ernst & Young Inc.
Representative: Paul David Hickey
htt://ww.ic.gc.ca/eic/site/bsf-osb.nsf/eng/ _ br02281.htm 07/0412010
Offce of the Superintendent of Banptcy Canada - CCAA Records Page 2 ofS.'
201-877-806-3597www.ey.com/ca/atcon
ConjuChem Biotechnologies Inc.February 26, 2010
Monitor: RSM Richter Inc.Representative: Gilles Robillard514-393-5433www.rsmrichter.com/Restructuri ngl
ConjuChem .aspx
Davie Yards Inc., Chantiers Davie Inc.February 25, 2010
Monitor: Samson Bélair/Deloitte & Touche Inc.Representative: Pierre Laporte514-393-5433www.deloitte.com/ca/chantiersdavie
White Birch Paper CompanyFebruary 24, 2010
Monitor: Ernst & Young Inc.
Representative: Martin P. Rosenthal
514-879-6549www.ey.com/ca/WhiteBirch
Darian Resources Ltd. and BowviewPetroleum Inc.February 12, 2010
Monitor: Hardie & Kelly Inc.Representative: Marc Kelly
403-252-1766http://rel ieffromdebt. cali ndex. phplDaria n- Resou rces- Ltd. -a nd - Bowview- Petroleu m-Inc.html
Archangel Diamond CorporationFebruary 3, 2010
Monitor: Monitor Not Appointed by the Court
Signature Aluminum Canada Inc.January 29, 2010
Monitor: m Consulting Canada Inc.Representative: Nigel Meakin
416-649-8065http://cfcanada.fticonsulti ng .comlsignature
North Star Manufacturing (London) Limited.January 20, 2010
Monitor: Ernst & Young Inc.
Representative: Michael Philip Dean
1-877 -855-0085www.ey.com/ca/northstar
Mariner Seafoods Inc.January 14, 2010
Monitor: Grant Thornton Limited.Representative: Daniel Rozon
902-420-7195www.grantthornton.ca/services/reorgl bankruptcy and insolvencylMarinerSeafoods
Canwest Publishing Inc. et al.January 8, 2010
Monitor: m Consulting Canada Inc.Representative: Paul Bishop
http://ww.ic.gc.ca/eic/site/bsf-osb.nsf/eng/ _ br02281.html 07/0412010
Offce of the Superintendent of Banptcy Canada - CCAA Records
21
MMFX Steel of Canada, Inc., et al.January 6, 2010
TLC Vision CorporationDecember 23, 2009
Résidences du Collège CRP Inc.December 17, 2009
Les Industries Show Canada Inc., LesIndustries Show Canada (US) inc.,3665658 Canada inc.December 16, 2009
Impax Energy Services Income Trust, et alDecember 14, 2009
Hollnger Canadian Publishing Holdings Co.December 10, 2009
Allen-Vanguard CorporationDecember 9, 2009
Brainhunter Inc., Treklogic Inc., BrainhunterCanada Inc., Brainhunter (Ottawa) Inc. andProtec Employment Services LimitedDecember 2, 2009
Page 3 of8
.416-649-8053http://cfcanada.fticonsulting .com/c1p
Monitor: RSM Richter Inc.Representative: Mitch Vininsky
416-932-6013416-932-6228www.rsmrichter.com/Restructu ri ng/M M FX. aspx
Monitor: Alvarez & Marsal Canada Inc
Representative: Richard Anthony Morawetz416-847-5172www.alvarezandmarsal.com/tlcca nada
Monitor: PricewaterhouseCoopers Inc.Representative: Christian Bourque
514-205-5434www.pwc.com/car-crp
Monitor: Raymond Chabot inc.Representative: Nicolas Boily514-393-4777www.raymondchabot.com/showcanada
Monitor: KPMG Inc.
Representative: Pardeep (Pam) Boparai604-691-3422403-691-7996www.kpmg.ca/impax
Monitor: Ernst & Young Inc.
Representative: Alex Morrison
416-943-7743http://www . ey. comft/hcp-h
Monitor: Deloitte & Touche Inc.Representative: David James Boddy613-751-5227www.deloitte.com/ca/allen-vanguard
Monitor: Deloitte & Touche Inc.Representative: Paul M.Casey
416-775-7172www.deloitte.com/ca/brainhunter
Aero Inventory (UK) Limited, Aero Inventory Monitor: KPMG Inc.Pic Representative: Nicholas BreartonNovember 11, 2009 416-777-3768
htt://ww.ic.gc.ca/eic/site/bsf-osb.nsfieng/h_br02281.html 07/04/2010
Office of the Superintendent of Banptcy Canada - CCAA Records Page 4 of8
22www.kpmg.ca/en/ms/cl/aeroinventory
Big Sky Farms Inc., Drycast Systems Inc. andBig Sky Management Consulting Corp. .November 10, 2009
Monitor: Ernst & Young Inc.
Representative: Kevin Brennan604-891-8300www.ey.com/ca/bigskyfarms
A.C. Ltd.October 30, 2009
Monitor: RSM Richter Inc.Representative: Robert J. Taylor403-233-7112www.rsmrichter.com/Restructuring/AC. aspx
Dura Automotive Systems (Canada), LtdOctober 30, 2009
Monitor: PricewaterhouseCoopers Inc.Representative: Gregory Prince
416-814-5752www.pwc.com/car-dura
Brute Force Oil Field Hauling Inc.October 15, 2009
Monitor: Hardie & Kelly Inc.Representative: Marc Kelly
403-252-1766http://relieffromdebt.ca/i ndex. phplBrute-Force-Oil- Field-Hauling- Inc. html
Glendyne Inc.October 9, 2009
Monitor: Lemieux Nolet inc.Representative: Claude Moisan418-659-7374www.lemieuxnolet.ca/bibliotheque.asp
Bruce R. Smith Limited and John Henry SmithLand Inc.October 8, 2009
Monitor: The Fuller Landau Group Inc.Representative: David Filce416-645-6506www.fullerlandau.com/site/brucersmith.htm
Canwest Global Communications Corp., et al.October 6, 2009
Monitor: ITI Consulting Canada Inc.Representative: Greg Watson1-888-318-4018 I 416-572-2236http://cfcanada.fticonsulting .com/cmi
..Top of Page
Search by company name
A
A.C. Ltd. Monitor: RSM Richter Inc.
htt://ww.ic.gc.ca/eic/sitelbsf-osb.nsfieng/_br02281.htm 07/04/2010
23
Offce of the Superintendent of Banptcy Canada - CCAA Records Page 5 off
Aero Inventory (UK) Limited, Aero InventoryPic
Allen-Vanguard Corporation
Archangel Diamond Corporation
Atcon Construction Corporation Inc.
Representative: Robert J. Taylor403-233-7112www.rsmrichter.com/Restructuri ngLACasgx
Monitor: KPMG Inc.Representative: Nicholas Brearton
416-777-3768www.kpmg.ca/en/ms/cllaeroinventQ
Monitor: Deloitte & Touche Inc.Representative: David James Boddy613-751-5227www.deloitte.com/ca/a II en-va ngua rd.
Monitor: Monitor Not Appointed by the Court
Monitor: Ernst & Young Inc.
Representative: Paul David Hickey1-877-806-3597www.ey.com/ca/atcon
B
Bear Mountain Master Partnership et al
Big Sky Farms Inc., Drycast Systems Inc. andBig Sky Management Consulting Corp.
Brainhunter Inc., Treklogic Inc., BrainhunterCanada Inc.. Brainhunter (Ottawa) Inc. andProtec Emplment Services Limited
Bruce R. Smith Limited and John Henry SmithLand Inc.
Brute Force Oil Field Hauling Inc.
Monitor: PricewaterhouseCoopers Inc.Representative: Christopher Stocco
1-604-806-71631-604-806-7050 ext 4146http:llwww.pwc.comlca/enI car Ibea rmou nta i n/i ndex.j htm i
Monitor: Ernst & Young Inc.
Representative: Kevin Brennan
604-891-8300www.ey.com/ca/bigskyfarms
Monitor: Deloitte & Touche Inc.Representative: Paul M.Casey
416-775-7172www.deloitte.com/ca/brainhunter
Monitor: The Fuller Landau Group Inc.Representative: David Filice416-645-6506www.fullerlandau.com/site/brucersmith.htm
Monitor: Hardie & Kelly Inc.Representative: Marc Kelly403-252-1766
http://ww.ic.gc.caJeic/site/bsf-osb.nsf/eng/ _ br02281.htm 07/04/2010
Offce of the Superintendent of Banptcy Canada - CCAA Records Page 6 of!?
24relieffromdebt. cali ndex. ph pIBrute-Force-Oi 1- Field-Hauli ng- Inc. html
c
Canwest Global Communications Corp., et al. Monitor: FTI Consulting Canada Inc.Representative: Greg Watson1-888-318-4018 I 416-572-2236cfcanada. fticonsulting .com/cmi
Canwest Publishing Inc. et al. Monitor: m Consulting Canada Inc.Representative: Paul Bishop
416-649-8053cfcanada. fticonsulting .com/clp
ConjuChem Biotechnologies Inc. Monitor: RSM Richter Inc.Representative: Gilles Robillard514-934-3497www.rsmrichter.com/Restructuring/ConjuChem .aspx
Cover-All Holding Corp. et al Monitor: Ernst & Young Inc.Representative: Neil -Narfason
403-206-5067www.ey.com/ca/cover-all
D
Darian Resources Ltd. and BowviewPetroleum Inc.
Monitor: Hardie & Kelly Inc.Representative: Marc Kelly403-252-1766rei i effrom debt. cali ndex. ph pIDa rian- Resources- Ltd. -a nd- Bowview- Petroleu m-Inc.html
Davie Yards Inc., Chantiers Davie Inc. Monitor: Samson BélairfDeloitte & Touche Inc.Representative: Pierre Laporte514-393-5433www.deloitte.com/ca/cha ntiersdavie
Dura Automotive Systems (Canada), Ltd Monitor: PricewaterhouseCoopers Inc.Representative: Gregory Prince416-814-5752www.pwc.com/car-dura
G
Glendyne Inc. Monitor: Lemieux Nolet inc.
htt://ww.ic.gc.ca/eic/sitelbsf-osb.nsf/eng/ _ br02281.htm 07/04/2010
Offce of the Superintendent of Banptcy Canada - CCAA Records Page 70f8
25Representative: Claude Moisan418-659-7374www.¡emieuxnolet.ca/bi bl i otheg ue. aSQ
'~"""""""-'-"""'~-"~---~~'-"-~""'¥--""''.''-''-~''-''-'''-'''-'''-.............._----...,........_------....-..._-....._............_......"..-......-_....__."......."--......--......-..-"....,,....---.......----.............-..__....."........¥.._-..........~...
H
Hollnger Canadian Publishing Holdings Co. Monitor: Ernst & Young Inc.
Representative: Alex Morrison
418-659-7374www.ey.com/ca/hcph
,..._.........,......_......."._...._.._.OW...."".."..._......._......................"..........._"'....._.........__--....__.._......_.."_._.._____..._.."__~..,,..._........""_.,,""...._,,...._..._....,....__........"'...._,,_"'_...._..._......_...-_........_...._..__"'......,._.............."".......,.
I
Impax Energy Services Income Trust, et al. Monitor: KPMG Inc.Representative: Pardeep (Pam) Boparai604-691-3422403-691 -7996www.kpmg.ca/impax
M
Mariner Seafoods Inc. Monitor: Grant Thornton Limited.Representative: Daniel Rozon
902-420-7195www.grantthornton.ca/servicesIreorg/bankruptcy andi nsolvency/M a ri nerSeafoods
MMFX Steel of Canada. Inc.. et al. Monitor: RSM Richter Inc.Representative: Mitch Vininsky
416-932-6013416-932-6228www.rsmrichter.com/Restructuring/M M FX.aspx
N
Nelson Financial Group Ltd. Monitor: A. John Page & Associates Inc.Representative: A. John Page416-364-4894www.ajohnpage.com/htmllfiles.html
North Star Manufacturing (London) Limited. Monitor: Ernst & Young Inc.Representative: Michael Philip Dean
1-877-855-0085www.ey.com/ca/northstar
R
http://ww.ic.gc.ca/eic/site/bsf-osb.nsf/eng/ _ br02281.html 07/04/2010
Offce of the Superintendent of Banptcy Canada - CCAA Records
26Page 80f8
Résidences du Collège CRP Inc. Monitor: PricewaterhouseCoopers Inc.Representative: Christian Bourque514-205-5434www.pwc.com/car-crp
sLes Industries Show Canada Inc. LesIndustries Show Canada (US) inc. 3665658Canada inc.
Monitor: Raymond Chabot inc.Representative: Nicolas Boily514-393-4777www.raymondchabot.com/showcanada
Signature Aluminum Canada Inc. Monitor: ITI Consulting Canada Inc.Representative: Nigel Meakin
416-649-8065cfcanada. fticonsulting .com/signature
T
TLC Vision Corporation Monitor: Alvarez & Marsal Canada Inc
Representative: Richard Anthony Morawetz416-847-5172www.alvarezandmarsal.com/tlccanada
w
White Birch Paper Company Monitor: Ernst & Young Inc.
Representative: Martin P. Rosenthal
514-879-6549www.ey.com/ca/WhiteBirch
Date Modified: 2010-03-30
htt://ww.ic.gc.caJeic/sitelbsf-osb.nsf/eng/ _ br02281.htm 07/0412010
27
This is Exhibit "B" referred to inthe Affdavit of Allyson Roy swornbefore me this 8th day of April,2010.
l¡2:;::~ ETC
Douglas B. B. Stewart
28IIC-ART 2008-6nc. Ar. 2008-6
Page 1
IIC-ART 2008-6
Insolvency Institute of Canada (Aricles)
- Corporate Group Insolvencies: Seeing the Forest and the Trees - Janis SaraIE
~ Thomson Reuters Canada Limited or its Licensors. All rights reserved.
Canadian courts have occasionally allowed substantive consolidation of commercial insolvency proceedings wherethere are multiple entities in a corporate group and the assets and debts are highly intertwined. Often, time is of theessence in making such judgments and there is little opportunity to reflect on the jurisdiction being exercised andthe broader principles being applied. A view of the globally integrated corporate group may ignore important as-pects of the individual business enterprise and its local creditors; at the same time, one can lose sight of the impor-tance of the global business entity if one is too caught up in viewing subsidiaries and related entities as separate.Treatment of corporate groups can challenge accepted notions of the separate legal personality, and requires care-
ful consideration when applied to cross-border proceedings.
Les tribunaux canadiens ont à /'occasion permis la réunion d'instances en insolvabilté commerciale lorsqu'un
groupe de sociétés compte diverses entités et que les actif et les passif sont fortement entremêlés. Souvent, les dé-lais sont de rigueur au moment où il faut prendre des décisions à cet égard ou réfléchir à la compétence judiciaireappropriée et aux principes plus généraux applicables. Une vision du groupe de sociétés globalement intégrées peut
faire en sorte que soient ignorés d'importants aspects propres à chaque société qui compose Ie groupe et aux créan-ciers respectif de ces sociétés. De la même façon, il est possible de perdre de vue /'importance de l'entité commer-ciale globale si les ¡Wales et les entités connexes sont perçues d'une maniére trop distincte. La façon dont sont con-sidérés les groupes de sociétés peut mette à l'épreuve la notion acceptée de personnalité juridique distincte et doitêtre mûrement réfléchie dans Ie cas d'instances internationales.
1. - Introduction
Corporate group fmancial distress poses unique challenges under insolvency and banptcy law.rFN21 When cor-porations have assets or operations in multiple jursdictions, separate legal entities are often formed to operate ineach jurisdiction, thus faciltating compliance with local regulatory requirements and managing liabilty risk for theentities. These business enterprises may be highly integrated and operate as a global unt, or they may operate rela-tively independently of one another.fFN31 A corporate group may also have separate legal entities for fmancingpuroses; for example, placing paricular assets in special purose entities with the asset lender as sole creditor, eventhough those entities are highy integrated on an operational basis.
When corporate groups are fmancially healthy, the "centre of control" is often the entity governing strategic andoperational oversight, with the separate subsidiaries or entities ensurg they meet expected regulatory and commer-cial standards of conduct in those multiple jursdictions. Each state in which the business enterprise is operatingsteps in to regulate the entities' conduct. The corporate group is a risk reduction strategy in the sense that claimsagainst one entity for parcular kids of conduct in a jurisdiction wil attach only to that legal entity, except in verylimited circumstances where the cours consider piercing the corporate veil.FN41
On insolvency, creditors in each of the domestic jursdictions wil seek to use domestic law to realize on their
Copr. ~ West 2010 No Claim to Orig. Govt. Works
2 SIC-ART 2008-6nc. Ar. 2008-6
Page 2
claims. Where companies in a corporate group operate independently and have few operational or financial linsother than a parent-subsidiar relationship, it may not pose a problem to deal with their insolvency as separate enti-ties. However, even in ths situation, there can be an issue where the practice has been to transfer the profits gener-ated by the subsidiar's economic activities to the parent corporation on a regular basis. In such a case, assets arelocated in one entity, the parent, whereas the credit, trade supplies and labour that were used to generate those assetswere advanced to the subsidiar. Given that they are separate legal entities in different jursdictions, fewer assets are
then available to meet creditors' claims.
Where control, finances and operations are highly integrated within the corporate group, then insolvency proceed-ings in the separate jurisdictions where the business entities are registered can pose enormous problems, creating therisk of premature liquidation of the companies to satisfy multiple domestic claims in multiple jursdictions'(FN51
The separate natue of these entities may make it diffcult to reorganize the corporate group as a whole, even wherevalue might be better maximized for creditors though a global resolution of the fi's financial distress. Even where
liquidation is the expected outcome, there may be merit in corporate group proceedings in order to preserve or en-hance value pending a going concern sale of one or more of the entities.(FN61
On a pure liquidation basis, arguably, entities in a corporate group should be liquidated as separate entities such thatcreditors that made explicit contracts with the specific corporation and evaluated their risk based on the stabilty ofthat corporation should be able to rely on that separate personality. Even this distinction can be blured, however,when the liquidation takes the form of a going concern sale, in which pars of the corporate group may be suff-ciently integrated that they are necessar to maximize sale value or perhaps necessar to the sale itself rFN71 Thereneeds to be operating priciples in respect of how to make a determination or how to proceed. However, to date,
consolidation cases have been approved on a pragmatic commercial basis with few judgments providing a detailedanalysis of the authority being involved or the operating principles being applied.
With the first experience internationally with the UNCITRA Model Law on Cross-Border Insolvency and Can-ada's recent adoption of large pars of the Model Law, the most significant outstading question for cross-border
insolvency is how to address the issue of corporate groups.rFN81 The Model Law, Chapter 15 of the United StatesBankruptcy Code, which adopts the Model Law almost in its entirety, and the new cross-border insolvency provi-sions in Par IV of the Companies' Creditors Arrangement Act (CCAA) are all silent on the issue of corporategroups.rFN91
There is the fuctional reality, especially with globalization, whereby the corporate parent can have a subsidiar inanother countr that is absolutely vital to the worldwide organation, but if the parent canot get coordinationacross jurisdictions, there is no maxiization of value. In such cases, commercial reality suggests that there must be,at minimum, coordination of multiple proceedings. This challenge is complicated by the use of centre of main inter-est (COM!) in jurisdictions adopting the Model Law or governed by EU insolvency directives. A paricularly diff-cult issue is where some of the corporate entities with the group are insolvent and others are not, an acute issue for
the civil law jurisdictions.
This aricle begins to examine the challenges posed and potential avenues for addressing both the legal and govern-ance issues of corporate groups in insolvency. As the expression "canot see the forest for the trees" suggests, onecan lose sight of the importance of the global business entity if one is too caught up in viewing subsidiaries and re-lated entities in different countries as separate legal personalities; equally, however, a view of the globally integrated
corporate group may ignore important aspects of the individual business enterprise and its local creditors. Hence,one must look at the "forest and the trees" in analysing the issue of corporate groups. Ths aricle seeks to ariculateprinciples that can be utilized by the cours in determing how to deal with corporate groups in insolvency proceed-ings. Par 2 of the aricle begins to defme what is meant by corporate group. Par 3 explores the legal treatment of
corporate groups. Par 4 discusses cross-border protocols as an important tool for coordination of proceedings. Par 5looks at the use of procedural and substantive consolidation in Canada and the U.S. as a mechanism for dealing withthe insolvency of corporate groups. Par 6 examines the concept of centre of main interests (COMI) in the EC Regu-
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¡alion and elsewhere and how it may influence the treatment of corporate groups. Finally, Part 7 discusses whetherCOMI should be adopted as a mechanism for dealing with cross-border insolvencies of corporate groups operatingas a global enterprise.
2. - Defining Corporate Group
There is not a universal defintion of the term corporate group. In many jurisdictions, corporate entities are separatelegal entities but their governance and capital strctues may be highly integrated, as in the U.K. and Germany. Inseveral jurisdictions, there is not really a concept of separate legal entities, but rather, the entities are subdivisions ofthe parent and thus seen as one corporate strctue, as in the Russian Federation.Wl In other jurisdictions, thecontrol is held through a family strctue, such that while legally the entities are separate, there is considerable con-trol exercised between the entities, as in some corporations in India or Canada.
Hence, it is helpful to commence with a working definition of corporate group. UNCITRAL's working definition ofcross-border enterprise groups is "two or more enterprises that are bound together by means of ownership or con-trol".rFN 1 11 Enterprise is defined as any entity, regardless of its legal form, engaged in economic activities, includ-ing entities engaged on an individual or parership basis as a parership or association, and can include business
trsts.rFNl21 The UNCITRAL Workig Group has defined control as "the power normally associated with theholding of a strategic position within the enterprise group that enables its possessor to dominate directly or indirectlythose organs entrsted with decision-makg authority."(FN131
Although there is not a universal defiition of corporate group, cours in different jurisdictions have recognized theterm as applying to the situation where two or more separate legal corporate entities are associated either though aparent-subsidiar relationship or lined by common, mutual, and/or interlocking shareholdings with capacity to con-
tro1.FN141 The challenge of a defiition is complicated by the natue of capital strctues in different jurisdictions.In Canada, Latin America, East Asia, and pars of Europe, the capital strctue of corporate groups is generally py_
ramidal in natue, with a controlling shareholder or group of shareholders holding voting control blocks in tiers ofthe corporation though both direct and indirect control, often with equity interest that is considerably less than thecontrol wielded though the corporate strctue.FNIS1 At the point offinancial distress, the controlling sharehold-ers, whose residual claims may be worthless, can utilize existing control to delay fiing or retain a governance strc-tue for a period even though it is not maxiizing value. While creditors wil ultimately determe the fate of thebusiness enterprises, the centralized control contrasted with the often fragmented natue of creditors' claims withseparate legal entities, can skew the process and work against maxizing value for creditors. In contrast, in the U.S.and U.K., corporate groups generally refer to one listed corporation with fully owned subsidiaries.(FN161
Corporate groups can create effciencies through lateral integration with suppliers or with retail outlets, often acquir-ing such entities during financially healthy periods.rFNl71 In some cases, such as a parent company's decision tomerge two wholly owned subsidiaries, a merger might not have significant economic effect, but when the combina-tion represents the union of two distinct businesses, new value may be created.rFNl81 Canadian companies oftengrow their business through mergers or acquisitions rather than relying solely on the longer term process of invest-ing in organic growth. In a highly competitive industr sector, a company may not have the time or resources to de-velop a new line of business that it feels is important to its success and may acquire a business that has the desirablecharacteristics that it is after.rFNl91 However that acquisition is strctued, either though a merger or maintenanceof separate legal entities with common control, the company may operate as a single integrated whole.rFN201
Where there is a single entity, there is transparency in that creditors understand the entity they are dealing with andcan make appropriate credit decisions. (FN211 Where the corporation is comprised of separate legal entities, the inte-gration of financial systems, co-miglig of supplies and common control can lead less sophisticated creditors intobelieving that they are dealing with one entity with a reputation that leads them to believe it is a good credit risk,while in reality their legal relationship is with a separate legal personality.rFN221 When fis are fiancially healthyand creditors receive timely payment, the corporate strctue is not paricularly important; however, when some
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par, or all, of the corporate group becomes fiancially distressed, the corporate form chosen at the outset wil affectthe treatment of creditors' interests in insolvency proceedings'(FN231 Where there is one legal entity, the corpora-tion wil be liquidated or restrctued as such, often involving the sale of pars of the business that have stand-alonevalue. Where, however, the corporate group consists of multiple legal entities, there is a greater challenge in respectof how to address the insolvency, given the natue of claims and the expectations of creditors that have dealt withthe separate entities.~
Once one moves beyond the corporate groups held in a pyramidal strctue, many companies in Canada are subsidi-aries of large multinational business enterprises, most often with the parent corporation in the U.S., but increasinglywith parent companes in Europe and Asia. Hence the Canadian capital strctue is a mix of parent corporations andsubsidiaries, many of which are par of a corporate group that spans borders. Consideration of corporate groups ininsolvency needs to account for the central and controlling featues of its pyramidal corporate groups, as well as thechallenge of multiple subsidiaries and the implications for domestic creditors if the corporate group's insolvency isdealt with on a centralized basis elsewhere, paricularly in jurisdictions where creditors and employees are not af-forded the same level of protection.
3. - Treatment of Corporate Groups
Canada's cross-border provisions in the Bankruptcy and Insolvency Act (BfA) and the Companies' Creditors Ar-rangement Act (CCAA) since 1997 have faciltated cross-border proceedings for financially distressed companies,the cours granting recognition under the priciples of comity and co-operation'(FN251 Treatment of corporate
groups has vared, and the cours have used cross-border protocols, as well as procedural and/or substantial consoli-dation, as tools to restrctue corporate groups or coordinate processes for liquidation and realization of
claims. (FN261
UNCITRAL defines procedural consolidation as "coordination of the administration of (separate) insolvency pro-ceedings in respect of two or more members of an enterprise group. Each member remains separate and distinct,thus preserving the integrity of the individual enterprises". The Workig Group has yet to agree on a defition ofsubstantive consolidation, but has proposed that it be defied as: "the pooling ofthe assets and liabilties of two ormore members of an enterprise group to create a single insolvency estate for the benefit of creditors of the substan-tively consolidated members".Il
Procedural consolidation can promote cost effcient and timely proceedings by faciltating dissemination of informa-tion regarding the economic activities of the enterprise group members subject to the insolvency proceedings; canfaciltate valuation of assets; can assist in identification and processing of creditors' claims; and can avoid duplica-tion of proceedings.~ Procedural consolidation can include the appointment of a single receiver or other insol-vency professional to assist with the proceedings or provide for coordination of such professionals. Such consolida-tion may include joint hearings and/or joint meetings of creditors; can allow for a consolidated service list for provi-sion of notice; can coordinate processing of creditors' claims; can coordinate the sale of assets; and can include, inthose jurisdictions that require creditors' committees, a single creditors' committee or coordination between credi-tors' committees.~
Substantive consolidation, according to the UNCITRAL proposed definition, "generally results in the extinguish-ment of intra-group liabilties. "Ir Often a single insolvency professional is appointed, although, as
UNCITRAL notes, that may depend on the stage in the proceeding at which consolidation occurs.Il The cur-
rent UNCITRAL draft suggests that substantive consolidation may be appropriate where the cour is satisfied thatthere has been such an intermingling of assets of the enterprise group members that it is impossible to identify own-ership of the assets or they canot be identified without undue expense and delay; where members of an enterprisegroup are engaged in fraudulent schemes with no legitimate purose and the cour is satisfied that substantive con-solidation is essential to rectify that activity; or where the cour is satisfied that the enterprise group presented itselfas a single enterprise or otherwise acted in a maner that encouraged third paries to believe that they were dealing
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with a single enterpriseJFN321 The draft acknowledges that there could be a parial substantive consolidation; spe-cifically, the cour may exclude specified assets or claims from an order for substantive consolidation, such as ex-cluding secured creditors to the extent they relied on the encumbered assets, or the cour may determine with respectto a solvent member of the enterprise group that consolidation includes only the net equity of the solvent members,leaving their creditors unaffected,(FN331
While the definition of corporate group or business enterprise group includes the notion of an integrated economicand operational unit, as noted above, corporate groups can be strctued in many ways. It is the corporate group thatoperates as an integrated global unit that requires public policy consideration of its treatment during insolvency; andspecifically, consideration of whether procedural or substantive consolidation of the insolvencies of the businessenterprise group is the appropriate mechanism to maximize value of the group'(FN34J.
Where there is a corporate group, the debtors' fiing choices are influenced by the specific objectives of the insol-vency proceeding. This is best ilustrated by the difference between Canadian and U.S. insolvency law, given thatmore than 90% of cross-border insolvency proceedings in Canada are with the U.S. For example, if a sale of all orsubstantially all of the businesses is anticipated, Canadian CCAA proceedings may be more expeditious and lessrigid than fiing in the U.S. and conducting the sale processes there. Similarly, treatment of executory contracts can
differ considerably and this differig treatment may affect choice of laws. DIP fiancing is more rule driven in theU.S. than Canada and may influence choice ofregimeJFN35J Directors and offcers tend to have broader indemnifi-cation in Canada than in U.S. restrctuing proceedings, and depending on the natue of claims against the debtorand its offcers, this may also influence where the debtors fie. The two countries differ in the natue and extent ofpriorities and provisions on avoidable transactions, fraudulent conveyances and preferences. Proposed changes toCanadian insolvency and banptcy law wil strengthen the priority given to employee claims and provide a differ-ent approach than the U.S. for treatment of collective agreements'(FN36J Many of these fiing considerations are not
attached to the notion of centre of main interests or control, but rather, the debtor's decision to initiate the fiing of aninsolvency proceeding, paricularly a restrctuing attempt, by using one or more entities to gain access to the juris-diction that offers the best statutory regime for the debtors' goals in the insolvency proceeding'(FN37J This practicemay not align with what creditors in each jurisdiction perceive as the jurisdiction that wil best serve their interests.
Where management or fiancing control is centralized, the corporate group may need to fie concurently in multiplejursdictions in order to continue operating, because a stay in one jurisdiction is not suffcient to allow such a cen-tralized strctue to continue durg the workout negotiation process,(FN38J Various companies in the corporate
group may be critical suppliers for other entities in the group. In such a case, there may be inter-company flow ofassets, which could give rise to claims on a solvent member of the corporate group or reviewable transaction claimswhere payments have been made in the period leading up to filing'(FN39J The debt strctue may be highly inte-grated, with inter-company loans that cross borders. There may be guarantees by one entity for another or by theoffcers of the company for debts of a member of the corporate group. Hence the corporate group may need to be
treated as an integrated whole, rather than numerous separate entities. Yet domestic creditors may have dealt onlywith a separate legal entity and not the corporate or enterprise group.
Concurent proceedings in respect of related companies frequently are commenced in multiple jurisdictions, al-though such proceedings mayor may not advance a global resolution of the debtor companes' insolvency, paricu-larly where regimes differ as to their liquidation or rehabiltation goals or where procedures var considera-bly'(FN40J Most of Canada's cross-border experience is with the U.S., where there is a degree of compatibilty inprocedural protections. However, where systems do not converge, the issue of centre of main interests and how thatmight align with corporate groups that cross borders is yet to be determed.
In a cross-border corporate group proceeding, the facilty with which the debtor wil be able to restrctue wil de-
pend to a large measure on the cour's wilingness to grant relief that faciltates the restrctuing but is not inconsis-
tent with domestic legislation.fFN411 Given that different regimes internationally have different normative concep-tions of insolvency, with paricular focus on rehabiltation or liquidation or a mix of both, the abilty to restrctue
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as a corporate group may be hampered if the cours narowly interpret an entity-based test for recognition or areunwiling to grant specific orders because they are not consistent with domestic law.(FN421
Cross-border proceedings also raise serious potential bariers for smaller trade suppliers or employee groups, whoface collective action problems in terms of being able to participate in hearings in a foreign jursdiction or even tomake the appearance in that other jurisdiction to voice concern about the potential prejudice to their interests,fFN431While some jurisdictions such as Canada may provide for representative counsel for paricularly vulnerable groupsor in the U.S. provide unsecured creditors' committees to address such bariers, where such mechanisms are notavailable, an issue is how the cour can be assured of the fairess and reasonableness of orders being sought in re-spect of the corporate group when all stakeholders are not before it. In Canada, the cour have addressed this in parby their careful admonition to monitors and proposal trstees that they are to be imparial offcers of the court thatare to have regard to the interests of all staeholders.
4. - Cross-Border Protocols
Cross-border insolvency protocols have been approved by Canadian, U.S. and other foreign cours as a mechanismto faciltate cross-border proceedings involving multiple related corporate entities. The protocols create a legalframework for the conduct of insolvency proceedings and coordination of administration of an insolvent estate inone jursdiction with administration in another.~ The cour orders endorsing cross-border protocols have dealt
with communcation and co-operation in the administration of proceedings, coordiation in ongoing operations, as-set sales and distrbution, claims fiing procedures and choice of law issues, and coordiation of development ofplans in two or more countries.
Protocols have been used effectively to reduce the cost of litigation and place the focus on restrctuing issues in-stead of conflct of laws disputes. These cases have involved Canadian debtor corporations with significant opera-tions and asset holdings in the U.S., or vice versa, and thus the debtor corporation's required recourse to protection
of insolvency laws in both jursdictions. A protocol sets out the ground rules by which concurent insolvency pro-ceedings can be coordinated; honours the sovereignty of the respective cours; haronizes activities in multi-jurisdictional insolvency proceedings; promotes the orderly and effcient administration of proceedings; promotesinternational co-operation and respect for comity among the cours; faciltates fair and open processes for insol-vency proceedings for the benefit of all paries; and implements a framework of general principles to address basicadministration issues arising out of cross-border insolvencies.~
Canadian cours, though their orders, directly request information and assistance, and in a nwnber of cases, proto-cols have allowed direct communication. For example, in Muscletech Research and Development Inc., the CCAAjudge and the Chapter 15 U.S. judge were in direct communication in respect of coordination and co-operation,fFN461 There have also been joint heargs conducted by Canadian and U.S. cours in restrctuing appli-
cations, allowing paries on both sides of the border to have the benefit of makg submissions and hearing the con-cerns of the cour without the fiter of reading their views in foreign judgments,fFN471 Joint heargs allow thejudges to directly communicate instead of only though wrtten judgments,fFN481 Given the time sensitive natue ofrestrctug proceedings, the use of joint hearings can expedite decisions, cut costs in terms of nwnbers of cour
appearances, and faciltate decisions that have pragmatic effect in bothjurisdictions,fFN491
With the amendments in 1997 to the CCAA to add section 18.6 and parallel cross-border provisions in the BIA, Ca-nadian practitioners in a number of cases have relied more directly on the provisions of the statutes and less on pro-tocols than previously. Section 18.6 allows the judges in different cross-border proceedings to directly communicatewith one another under the discretion that allows the CCAA judge to seek the aid and assistance of anothercour.(FN501
In Menegon v. Philip Services Corp., the Cour held that the objective of a protocol is to protect claimants on either
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side of the border from being swept into the rigours of the other countr's regime, where to do so might preventthem from asserting their substantive rights under the applicable laws of their own jursdictions; and while faciltat-ing cross-border proceedings, the protocols canot undermine domestic statutory standards.rFN51l
The Alberta Cour of Queen's Bench in Calpine made some observations in respect of protocols in terms of whenthey may be inappropriate or prematue.rFN521 With US$18 biIionin debt, Calpine and almost 300 subsidiariesfied under Chapter 11 of the U.S. Bankruptcy Code and twelve Canadian Calpine entities applied for protectionunder the CCAA. Calpine had operated as a global company with a large amount of highly complex inter-companydebt; however, the Chapter 11 and CCAA proceedings were conducted relatively independently of one another at theoutset. Yet this separation of the global operations into two proceedings was challenging, as there was an ongoingneed to supply gas from the Canadian entities to the U.S. power plants, and the Canadian Calpine affliates weresome of the U.S. Calpine companes' largest creditors.rFN53J Neither the CCAA debtors nor the Chapter 11 debtorshad sought to have their proceedings recognized in the other jursdiction; and when an application was made for across-border protocol, Romaine J. held that a cross-border protocol was prematue.FN541 The Cour held that aprotocol should not be a method to delay or obfuscate proceedings or to provide re-hearg of the cour of one juris-
diction in the cour of another. The Cour observed that while there were common issues among the CCAA debtorsand the Chapter 11 debtors, they were adverse in interest in other respects as the CCAA debtors were major creditorsin the U.S. claims process. The Cour held that the negotiation of a cross-border protocol should be a matter of dis-cussion, negotiation and cooperation between interested paries before a form of protocol is presented to the coursfor review and approvaUFN551
Hence, while protocols have signficant potential to facilitate cross-border coordination of corporate groups, thecour must be persuaded that they are advancing coordination and co-operation and not being used merely as amechanism to re-litigate issues.~ Moreover, it appears as if the Canadian cour may require a cogent rationale
for a protocol. The cours in Calpine subsequently endorsed a cross-border protocol when satisfied that it had beenproperly negotiated and advanced the interests of multiple stakeholders on both sides of the border.
5. - What Justice Dictates and Practicality Demands
The CCAA is designed to serve a broad constituency of investors, creditors, and employees and its effectiveness inachieving its objectives is dependent on a broad exercise of jursdiction to faciltate a restrctuing.(FN571 The no-tion of "what justice dictates and practicality demands" is a recuring theme in Canadian insolvency proceedings,and appears to be an unwritten principle that cours have applied to proceedings in which procedural or substantive
consolidation of corporate groups is sought.~ The cours consider the commercial realities of corporate groupsin their multiple forms, but equally, they are concerned with justice to multiple paries implicated in the group's in-solvency.
Canadian cours have held that they have broad authority to make orders that deal with corporate groups in insol-vency even where there is not express statutory language.rFN59J The exercise of the cour's broad statutory author-ity is most frequently relied on, although the cours have also exercised their equitable jurisdiction.rFN60J For ex-ample, in Lehndorff Justice Farley held that the cour had the jurisdiction to supplement the statuory stay provisionsof the CCAA to order a consolidated plan, and that it was just and reasonable to do so where the fmancial and busi-ness operations of the applicants were very intertined and where each of the applicant companies had a realisticpossibilty of being able to continue operating.rFN61l Jackson and Sara have observed that where the statutory lan-guage is under-inclusive, the exercise of statutory authority requires the statute to be constred having regard to theobjective of the statute and the mischief rule, including its codification under interpretation statutes that every en-actment is deemed remedial and is to be given such fair, large and liberal interpretation as best ensures the attain-ment of its objects; statutory interpretation using these principles leaves room for gap-filling in the common lawprovinces and a consideration of purose in QuébecJFN621 While Canadian cours have frequently not ariculatedthe source of their authority to deal with corporate groups, other than brief acknowledgment that they have suchauthority, the broad jurisdiction of the cours under Canadian insolvency legislation allows the cour to engage in
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gap-filling in its exercise of authority in appropriate circumstances, which may include recogntion of corporategroups.rFN631 What is needed, however, is an ariculation of the principles being applied by the cours in the exer-cise of such authority.
Even where there is no formal consolidation, the cours have used their broad statutory authority to approve proce-dures that faciltate a resolution of the corporate group's fiancial distress. In Calpine, the proceedings in the early
months proceeded in tandem, rather than though a protocol, as noted above. However, there were memoranda ofunderstanding on specific issues.fFN641 One memorandum addressed the fact that one of the unlimited liabiltycompanies of Calpine located in Nova Scotia, Canada had raised bilions of dollars in public bond debt, most ofwhich had gone to the U.S. entities, and hence the Canadian debtor might not have a direct claim against the entitythat ended up with the assets.rFN651 Given that the assets raised though one of the Canadian Calpine debtors werelent on throughout the parent and affliates in the U.S., the creditors of the U.S. entities were the Canadian debt-ors.rFN661 While the bondholders as creditors of the Canadian debtors would be the beneficiaries of any assetseventually realized, they had no direct claim against the U.S. debtors. Recovery of their claims depended on the Ca-nadian debtors recovering their inter-company loans, most of which were to the U.S. Chapter 11 debtors. The debt-ors permitted the indentue trstees for the public bondholders to fie certain claims they deemed necessar in theU.S. proceedings on behalf of the Canadian Calpine entities that were the issuers of the public bond debt.FN671Hence, while the public bondholders were not granted any right to prosecute claims, they were, under an issue spe-cific agreement, able to move to protect their claims by fiing in a timely maner under the U.S. claims processagainst the U.S. Calpine debtors. The cours endorsed the strategy as a means of faciltating the proceedings.
In the context of applications for consolidation under the CCAA, the cours have recognized their broad statutoryauthority to order substantive consolidation and a single plan of arangement, based on evidence of significantlyintertined business affairs and no prejudice to creditors.fFN681 Paries have devised solutions that appear to work
in that they maximize the value of the enterprise and there is no substantial injustice. There are usually several dif-ferent ways that paries can approach a solution to the corporate group's insolvency, and generally, the paries havecome up with fuctional solutions such that corporations can surive where there is a viable business plan. That sur-vival may entail procedural consolidation or somethg more.
The most common mechansm to deal with corporate groups in Canada is procedural consolidation, in which thecour administers insolvency proceedings of multiple entities as one proceeding as a mechanism to deal with credi-tors' claims effectively.fFN691 Where entities are located with one jurisdiction, this recognition is a relativelystraightforward and uncontested administrative order. Procedural consolidation can reduce costs and expedite theproceedings. Where the entities are located in multiple jurisdictions, the cours have balanced interests and prejudicein makg such determinations. Creditors' claims remain as claims to the value of the assets of the paricular entitywith which the creditor contracted, and creditors deal with the interrelatedness of the corporate entities by bringingclaims for preference or other reviewable transactions. For the most par, procedural consolidation is uncontested in
Canada.
It is in respect of substantive consolidation that there is a lacuna in judicial reasoning as to the priciples to be ap-plied. Substantive consolidation essentially treats member entities of a corporate group as one entity. In the contextof liquidation, it creates a common pool of assets to meet creditors' claims. In the context of restrctuing, it maycreate the opportity for creditors to share in the futue upside potential of a restrctued entity or entities by cen-tralizing and negotiating an arangement in respect of their claims. Canadian cours have recognized substantiveconsolidation under both the BfA and the CCAA where there is evidence of intertined assets and liabilties; inte-grated administrative fuctioning and operations; a perception by creditors that they are dealing with an integratedentity; common control and governance strctues; where it would be impracticable to separate the affairs of relatedentities; where it is more cost effective and beneficial to creditors to have the proceedings adminstered as a singleestate; and where it would result in an expeditious and administratively effcient administration of the proceed-
ing.fFN701
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The cours have recognzed that consolidation may benefit some classes of creditors over others, but where the ar-guably prejudiced creditors are unlikely to see any recovery so that consolidation is unlikely to fuer prejudicetheir interests, the cour may approve a consolidation order.FN711 The cours have held that while an expeditiousproceeding is an appropriate factor for the cour to consider, consolidation should not be ordered where there is po-
tential prejudice and expense to paricular creditors.rFN721
In Re PSI Net Ltd., Justice Farley held that a consolidated plan avoided the complex and likely litigious issues sur-rounding the allocation of the proceeds from the sale of substantially all of the assets of the applicants, and that itreflected the intertined natue of the applicants and their business operations.fFN731 The businesses in essence
operated as a single business and record-keeping was deficient such that assets were diffcult to separate.rFN741 Inthe circumstances of the case, the Cour held that the fiing of a consolidated plan was appropriate and that while
consolidation by its very natue wil benefit some creditors and prejudice others, it is appropriate to look at the over-all general effect in making such a determnation.fFN75J
In Ashley v. Marlow Group Private Portfolio Management Inc., the proceedings involved the collapse of a relatedgroup of corporations, whose affairs were substantially intertined and extremely complex.rFN76J In declining togrant substantive consolidation, the Cour observed that while control and administration of the corporate entitieswere undertaken by one par, a consolidation order should not be made where there is possible prejudice to a par-ticular creditor.FN771 The Cour held that it was important to consider what the effect of a substantive consolida-tion would be, specifically, it would treat all of the corporate defendants as one entity with a common pool of assetsto be shared by all their creditors on a pari passu basis. The Cour held that there is no specific authority in the BIAto grant an order for substantive consolidation, but that the cour had authority to do so under its equitable and statu-tory jurisdiction. The Cour rejected the receiver's application for substantial consolidation on the basis that the re-ceiver had not provided evidence concerning the effect on all the creditors of all the corporate defendants if therewas a substantive consolidation, and whether this would adversely affect the rights of any creditor of any individualcompany.
Most of the judgments have been determed largely on the basis of factual circumstances. While the cours haverarely had occasion to ariculate the broad principles that would be applied in makig such a substantive consolida-tion order, one can draw out principles; specifically, the requirement of evidence of significant intertinng of fi-
nancial affairs, business operations and control; the need for fairess and reasonableness of the proposed plan orstrategy; and the amount, degree and tye of prejudice to creditors from a consolidation.rFN7SJ The cours haveheld also that creditor consent is a factor to consider, given that the effect of such an order is to create a commonpool of assets, and the amount of creditor support for the plan must tae into account whether there has been suff-cient time and information for creditors to make a reasoned decision.rFN791 The cour appear to be divided as towhether prejudice to a single creditor is suffcient to defeat an application for substantive consolidation, or whether
that is a broader balancing of interest.FN801 The cours have also considered the extent to which a consolidatedplan avoided complex and litigious issues surounding the allocation of proceeds from the sale of substantially all ofthe debtor companies' assets; and the commingling of records and inventory.
The cour wil also consider the timing of creditors' opposition to consolidation. In an application by Global LightTelecommuncations et al for an order sanctioning a consolidated plan of arangement, the B.C. Supreme Courgranted a consolidation order.FNSIJ The Cour held that the objecting creditor was aware that the consolidated planwould deprive it of the right to claim recovery on its guarantees and had not opposed the application to consolidateat the hearing regarding the procedural order. The Cour held that the creditor could not at the plan sanctioning stagecomplain about adverse effects flowing from the consolidated plan, and the Cour was satisfied that the plan was fairand reasonable in the circumstances.
In the U.S., substantive consolidation has been utilized as a mechanism to pierce the corporate veil or to impose eq-uitable subordination.~ The U.S. Cour of Appeals Third Circuit observed that these remedies have subtle dif-ferences:
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"Piercing the corporate veil" makes shareholders liable for corporate wrongs. Equitable subordination placesbad-acting creditors behind other creditors when distrbutions are made. Turover and fraudulent tranferbring back to the transferor debtor assets improperly transferred to another (often an affliate). Substantiveconsolidation goes in a direction different (and in most cases fuer) than any of these remedies; it is not lim-ited to shareholders, it affects distrbution to inocent creditors, and it mandates more than the retu of spe-cific assets to the predecessor owner. It brings all the assets of a group of entities into a single surivor. In-deed, it merges liabilties as well. "The result," to repeat, "is that claims of creditors against separate debtorsmorph to claims against the consolidated surivor." The bad news for certain creditors is that, instead of look-ing to assets of the subsidiar with whom they dealt, they now must share those assets with all creditors of allconsolidated entities, raising the specter for some of a significant distribution diminution.fFN83)
U.S. cours require some evidence that the parent entity should be liable for the misconduct of a related corporateentity before they wil draw aside the corporate veiL. Cours require evidence of inequitable conduct before they wilintervene on the basis of equitable subordination to set aside the prima facie priority of claims in an insolvency pro-ceeding. U.S. cours have also utilzed the alter ego doctrine in deciding consolidation, assessing whether the parentcorporation owns substantially all of the capital of the subsidiar; whether the corporate offcers of the subsidiary actindependently ofthe parent or are the same people; whether the capital strctue of the subsidiar is integrally tied tothe parent and whether it is under-capitalized; the inter-relatedness of the business; and whether the entities exhibitevidence of operating as separate legal personalities.fFN84)
In re Owens Corning, the U.S. Cour of Appeals, Third Circuit held that substantive consolidation is an equitableremedy that may be available where the entities disregarded the separateness of the corporate entity so significantlythat their creditors relied on the breakdown of entity borders and treated them as one legal entity, or that post-petition, their assets and liabilties were so scrambled that separating them was prohibitive.rFN85) Cours shouldrespect entity separateness absent compelling circumstances that call equity into play; and hence the key considera-tion is the har caused by the debtors in disregarding corporate distinction, not the har resulting from the actions
of creditors.fFN86) The Cour held that "commingling justifies consolidation only when separately accounting forthe assets and liabilties of the distinct entities wil reduce the recovery of every creditor - that is, when everycreditor wil benefit from the consolidation."rFN87) Hence, substantive consolidation wil be rarely ordered in theU.S.IB
6. - Centre of Main Interests (COM!)
Canada's new CCAA, Par IV, the UNCITRAL Model Law and Chapter 15 of the United States Bankruptcy Codeall adopt COMI as the mechanism for determing where proceedings should be commenced and which jurisdictionshould have principal oversight of the restrctug or liquidation proceedings. COMI is not defied in the statutes.The Canadian provisions, as others, specify that in the absence of proof to the contrar, a debtor company's regis-tered offce is deemed to be the centre of its main interests'(FN89) There is no legislative guidance on the evidencethat might be relied on to rebut the statutory presumption. The UNCITRAL Legislative Guide on Insolvency Lawdefines COMI as "the place where the debtor conducts the administration of its interests on a regular basis and thatis therefore ascertainable by third paries. "rFN90) A debtor must have a suffcient connection to a state to be subjectto its insolvency laws.~ The practical effect is that corporate entities can be registered in one jursdiction, buthave their COMI elsewhere. Equally, arguably, COMI could be located within one entity of a corporate group eventhough registration of the entities in the corporate group is in other jursdictions.fFN92)
Since Chapter 15 of the U.S. Bankruptcy Code came into force, there have been a number of cases of Canadian for-eign representatives seeking recognition of foreign main or non-main Canadian proceedings in the U.S.rFN93) TheCOMI of the Canada-U.S. cross-border proceedings has been largely uncontested.fFN94)
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In Muscletech Research and Development Inc., Canadian debtor companies had sold products in the U.S. that gaverise to U.S. product liabilty and consumer class action suits,(FN9S1 The Canadian Cour found that Canada was theCOMI on the basis that: all the applicant companies were incorporated and registered in Canada; the principals, di-rectors, and offcers were Ontario residents; and all decision-makg, fiancing and administration took place inCanada.(FN961 Hence the indicia of COMI were found to include place of registration, place of decision- making,and financial control and baning, as well as adminstrative and operational factors. In granting the Chapter is peti-tion in Muscletech, the U.S. District Cour made the fiding that the applicants' COMI was located in Canada, basedon the factors that were identified by the Canadian Cour. In the Chapter is proceeding, the U.S. Banptcy Courgranted the monitor's request to recognize and enforce a Canadian order setting out the claims procedure'(FN971
This is a significant judgment in that it indicates the cour's wilingness to endorse a cross-border claims procedureand legal system that does not completely align'(FN981 The allegation by the objecting paries was that the CCAAclaims procedure violated their constitutional right to a jur triaL. The Cour held that the "manifestly contrar to thepublic policy of the United States" exemption in Chapter is was to be interpreted narowly, and while the constitu-tional right to ajur is an important component of the U.S. legal system, it was diffcult to detect what unfairess aplaintiff would suffer from having a civil case decided by a judge, and in the circumstances, the claims procedurewas fair and impartiaL.
In re SPinX Ltd, the U.S. Banptcy Cour Southern District of New York considered the issue of recognition offoreign main versus non-main proceedings. Joint offcial liquidators of a number of debtors registered in the Cay-man Islands, called collectively the SPin Funds, were engaged in voluntar wind-up proceedings under supervi-sion of the Grand Cour of the Cayman Islands, and sought recogntion in the U.S. for the Cayman proceedings as aforeign main proceeding'(FN991 The U.S. Banptcy Cour declined to recognize the Cayman Islands proceedingas a foreign main proceeding. The Cour observed that while cours should generally defer to any creditor acquies-cence in support of a proposed COMI, here, the SPin Funds did not conduct any business in the Cayman Islands;had no employees, managers, or directors located there; and no assets were located there except minute books andother minimum statutory requirements under Cayman law,(FNlO01 The Cour held that it was appropriate to recog-nize a foreign non-main proceeding, even though there was no foreign main proceeding yet recognized in anotherjurisdiction, finding that this was a better approach than deferring any recognition, as there were competent jointoffcial liquidators under the supervsion of the Cayman cour ready to pedorm the winding-up fuction. Signifi-cantly, the Cour failed to address the requirement under § IS02(5), which requires an "establishment" in the foreignjurisdiction in order to come within the defiition of foreign non-main proceeding. fF 1 Oil
In Bear Stearns High-Grade Structured Credit Strategies Master Fund, the U.S. Banptcy Cour for the SouthernDistrict of New York disagreed with the cour's fidings in re SPinX Ltd,(FN1021 Judge Buron Lifland denied rec-ognition of a foreign proceeding to joint provisional liquidators of Bear Stears High-Grade Strctued CreditStrategies Master Fund, Ltd. and Bear Stears High-Grade Strctued Credit Strategies Enhanced Leverage MasterFund, Ltd. (the "Funds") pursuant to Chapter is, declining to recognize liquidator proceedings in the Grand Cour ofthe Cayman Islands as foreign main proceedings or as foreign non-main proceedings. The Funds were both CaymanIslands exempted limited liabilty companies with registered offces in the Cayman Islands, adminstered out of theU.S.(FNl031 The Cour held that "the presumption that the place of the registered offce is also the center of thedebtor's main interest is included for speed and convenience of proof where there is no serious contro-versy. "(FNI041 However, the Cour held that this presumption is not a preferred alternative where there is a separa-tion between a corporation's jursdiction of incorporation and its real seat.FN IOS1 Relying on the UNCITRAL Leg-islative Guide, Judge Lifland held that various factors could be relevant to such a determination, including: the loca-tion of the debtor's headquarers and managers; the location of the debtor's primar assets; the location of the major-ity of creditors that would be affected by the case; and/or the jurisdiction whose law would apply to most disputes;here, the presumption that the COMI was the place of the Funds' registered offces had been rebutted by evidence tothe contrar. Their COMI was the U.S., the place where the Funds conducted the adminstration of their interests ona regular basis and was therefore ascertainable by third pares.
The Cour in Bear Stearns also refused to grant recognition as a foreign non-main proceeding as there was no estab-
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lishment in the Cayman Islands. The Cour held that non-recognition of the foreign proceedings, however, did notleave the Petitioners without the abilty to obtain relief from U.S. cours. The Cour held that §303(b)(4) of theBankruptcy Code specifically provides that an involuntar case may be commenced under Chapter 7 or I I of theCode by a foreign representative of the estate in a foreign proceeding so that a foreign representative is not leftremediless on non-recognition.
(F1061
The judgment clarifies that the rebuttable presumption is not a default recognition of COMI where there is no objec-tion, but rather, is a statutory tool for the cour to determine COMI where the evidence is not to the contrar. Thecour addressed what was viewed as a flaw in the reasoning in re SPinX Ltd. in respect of fmding a non-main pro-ceeding where there was no establishment. Where operations of a corporate group are higWy integrated and central-ized in the jurisdiction of one corporate entity, for example the parent corporation, the U.S. cours, applying the BearStearns tests, may fmd that the COMI of the other entities is in the same jurisdiction as the parent or other control-ling entity.rFN i 071
COMI is also the criterion for opening proceedings in the EU under the EC Regulation on Insolvency Proceedings,although it is aimed at different puroses than the Canadian provisions.rFNlO81 A finding of COMI in one MemberState extends the reach of that state's insolvency law to assets located throughout the EU, a significant difference inuse of the term COMI than its use in Canada or the U.S,(FN1091 Aricle i of the EC Regulation restricts its applica-tion to collective insolvency proceedings that involve parial or total divestment of a debtor and the appointment ofa liquidator. Hence the Regulation excludes insolvency proceedings that although of a collective natue, leave thedebtor in full control of its estate and business.fFNllOl Although parial divestment allows the debtor to comewithin the ambit of the Regulation, there must be some degree of loss of the debtor's powers of administration andcontrol over the business and assets.
The EC Regulation utilizes COMI to determine where main proceedings should be commenced withi the EU. Ari-cle 3 of the Regulation creates a rebuttable presumption that the registered offce of a debtor company is the centreof its main interests in the absence of proof to the contrar. Ifa proceeding is qualified as a main proceeding pursu-
ant to the Regulation, the proceeding benefits from full exta-terrtorial effects, binding all Member States under theRegulation, and encompassing the debtor's assets globally. The Regulation states that the term COMI should corre-spond to "the place where the debtor conducts the adminstration of its interests on a regular basis and is thereforeascertainable by third paries."fFNI 1 11 The Regulation applies only to proceedings where the centre of the debtor's
main interests is located in the European Communty, not where its COMI lies elsewhere but there are non-COMIentities within the EC.fFNl 121 Hence COMI is used to limit the applicabilty of the Regulation. fFN I 131
The EC Regulation specifies that proceedings commenced where a debtor has an establishment are secondar pro-ceedings if there is already a main proceeding opened. However, the cour of a Member State can open a proceedingprior to a main proceeding commencing where the debtor has its COMI, called independent terrtorial proceed-ings.1F1141 If main proceedigs are subsequently opened, the territorial proceedings then become secondar pro-ceedings, restricted to liquidation of those assets situated in the paricular State.(F1l51 The Regulation definesestablishment as "any place of operations where the debtor cares out a non-transitory economic activity with hu-
man means and goods".fFNI 161 The lex concursus, the law of the Member State of the opening of the main pro-ceeding, applies to all of the debtor's propert, wherever situated, except to the extent that secondar proceedingshave been opened.rFNl171 The priciple underlying the rebuttable presumption that the COMI is the registered of-fice of the corporation is that creditors are entitled to certainty in their dealings with debtor companies, and that theyshould be able to make assessments of their risks of transacting with the debtor based on tranparency in respect ofwhich jursdiction's laws would apply in the event of insolvency.rFN 1 181
Eurofood IFSC Ltd. was the first EC appellate decision on COMI.rFNl 191 There, the European Cour of Justiceruled that where a debtor is a subsidiar company whose registered offce and that of its parent company are situatedin two different Member States, the presumption laid down in Aricle 3(1) of the Regulation that the COMI of thatsubsidiar is situated in the Member State where its registered offce is situated, can be rebutted only if factors that
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are both objective and ascertainable by third paries indicate to the contrar. The cour held that the Regulation mustbe interpreted in a uniform way, independently of nationallegislation.fFNl201 The presumption could be rebuttedwhere a company is not caring out any business in the terrtory of the Member State where its registered office issituated; however, the mere fact that its economic decision-making is controlled or could be controlled by a parentcompany in another Member State is not enough to rebut the regulatory presumption.
The ruling is significant for corporate groups as it expressly rejects a "command and control" approach to assessingCOMI, setting a high theshold to rebut the presumption. The Cour fuer held that a main insolvency proceedingopened by a cour of a Member State must be recognized by the cours of the other Member States, without the latterbeing able to review the jurisdiction of the cour of the openig State. The cour of a Member State may refuse torecognize insolvency proceedings opened in another Member State only where the decision to open the proceedingswas taken in flagrant breach of the fudamental right to be heard, which a person concerned by such proceedings
enjoys.fFNl21l
In BenQ Mobile GmbH & Co. OHG, the issue of whether related entities should be treated as a corporate group in aconsolidated proceeding arose in the context of the timing of applications before cours in Munich and Amster-dam.fFNl221 The Amsterdam Cour adopted the Eurofoods test and expressly declined to adopt a corporate groupcommand and control analysis.(FN1231 The German Cour authorized the opening of secondar proceedings on thebasis that the debtor conducted more than a transitory economic activity from its Munich business premises; andeconomic activity was recognzable to third paries.fFN1241 The judgments in BenQ indicate a high degree of defer-ence to the fist finding of COMI and main proceeding, as directed by Eurofoods. The cours recognized local credi-tor interests and the need for certainty in terms of creditors' reliance on the COMI of the debtor. However, the highlevel of deference may pose a problem for going concern solutions of a corporate group. Given that secondar pro-ceedings are restricted to liquidation proceedings in a Member State, absent coordination and co-operation, valuemay not be maximized though the separate realization of assets in secondar proceedigs. The high theshold forCOMI set by the ECJ and adopted by the cours in BenQ wil create greater certainty for creditors, but may raisenew challenges for seeking recognition for corporate groups in cases where paries seek multiple secondar proceed-ings.
The COMI issue is significantly different in Canada and the U.S. than for Member States subject to the EC Regula-tion; hence the case law is helpful but limited in its application. The ECJ COMI decision determines the applicablelaw in proceedings for all Member States, extending the law of the Member State of the main proceeding and thepowers of the liquidator thoughout the European Union. For non-EU states, until the meaning of the words "evi-dence to the contrar" in the test for COMI is settled, there wil be considerable transaction costs in litigating suchrecogntion and/or in multiple fiings across jurisdictions to prevent prejudice due to potential unwilingness ofcours to recognze corporate group proceedings.
7. - COMI of a Corporate Group
An unresolved question is whether there should be a special defiition of COMI for corporate groups. It is importantto place this question in the context of the Model Law's framework overall. The Model Law is aimed at shiftingcross-border insolvency towards a unversalism model, while stil allowing domestic cours to retain considerablejursdiction over domestic claims within a state.fFNl251 The notion of modified universalism under the Model Lawpresupposes a main proceeding in one jurisdiction, the recogntion of non-main proceedings in other jurisdictionsand application of the priciples of comity and co-operation to achieve an orderly resolution of the fi's financial
distress, whether that solution is liquidation, restrctug or some combination of the two. In this sense, the ModelLaw already represents a compromise of state sovereignty in that countres that endorse the law give up some sover-eign rights under domestic proceedings. The issue is whether COMI can be defied in paricular circumstances toallow members of a corporate group to all have their COMI in one state, even where their registered offces are indifferent states and there is economic activity in those states.
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One solution may be to enact a corporate group defiition of COMI. This might faciltate global workouts, but itmay also adversely affect creditors that have dealt with a corporate group entity on the assumption that the laws ofthe entity's home state apply. An alternative solution might be to treat each member of the group as having its ownCOMI, relying on protocols for cases where it is more effcient to administer the proceeding on a consolidated basisin the home state of the parent corporation. Both strategies would recognize corporate groups. However, conceptual-izing a defiition of corporate group COM! that can be appropriately applied to multiple jurisdictions wil be a chal-lenge. The objective is enhanced coordination, communication, expedition of the process, effciency in the time anduse of insolvency professionals, and fairess to local creditors.
In recognition of a corporate group COM!, it is important to avoid an inappropriate extension of domesticlaw.rFNl261 At the same time, it must be recognized that operationally, the entities in the corporate group may behighly integrated and highly regulated in each of the jursdictions in which they are registered.rFN1271 For example,if a parent corporation is located in Canada, but is operating subsidiaries in five other jurisdictions, would Canadianinsolvency and banptcy law extend to other jurisdictions? Absent agreement by paries to have Canadian lawapply to an integrated corporate organization, this could be an inappropriate extension of Canadian law and couldprejudice creditors located in those jursdictions where priorities or preferences differ, or where there are statutoryprotections such as "adequate protection" under the insolvency laws of the jursdictions in which the subsidiaries are
located.
Where corporations requie DIP financing during a workout proceeding, there may be issues as to whether the par-ent corporation could borrow operating and administration funds and direct those fuds to a subsidiar in another
jurisdiction. The DIP lender would want assurances of its priority claim, yet different jurisdictions have differentmechanisms for allowing post-commencement fiancing and different priorities assigned to such claims. The inabil-ity to have a priority recognized works directly to defeat restrctug efforts as the fiancing is what keeps the enti-ties operating pending a viable going-forward business plan. The UNCITRAL Workig Group has observed thatsome of the strctual impediments to providig new money include lack of statutory authority in some jurisdictionsto order post-commencement fiancing; and personal liabilty of insolvency representatives or directors or offcers
for incuring the debts that such fiancing would entaiUFN1281 It also suggests that the issue of which entities mayaccess fuds could be dealt with concurently though protocols approved by cours with concurent jursdiction.This would assist in resolving any issues in respect of the uncertainty of who is liable for non-payment of the prior-
ity financing.
The UNCITRA Workig Group is deliberatig on whether to establish a concept of "centre of main interests of acorporate group" where there is a high degree of integration between members ofa corporate group and the group isru essentially as a single entity.IFN1291 The concept could be defied by reference to how and where policy, man-agement and fiancial decisions of the corporate group are made or caried out and creditor perceptions of that loca-tion.fFN1301 There would have to be a defmition of the requisite level of integration.rFN13 11 Adoption of this ap-proach would put the onus on creditors to ascertain whether the corporation they were dealing with was par of acorporate group. While this requirement may not pose a challenge for senior lenders who can require such disclo-sures as par of the due dilgence in makg credit decisions, it may create problems for trade suppliers, employeesand other creditors who face bargaining and inormation asymetres.
The substantive consolidation of proceedigs also raises the question of whether there should be creditors' commit-tees, with representatives of creditors of the parent enterprise, as well as subsidiaries in the corporate group. Even ifthere is provision for creditors' committees, unsecured creditors who are located in jursdictions other than where theproceeding is being conducted may stil face bariers to paricipation.rFN132J There may also be concerns about theabilty of employees and pensioners to paricipate in workout proceedings, where the corporate group proceeding is
not in their home state. These barers to paricipation may include both informational and cost bariers, resulting inthe cour not having all the interests at stake before it when makig substantive decisions in respect of the proceed-ing. Consolidation implicates notions of creditors' reasonable expectations, as well as public interest and public pol-icy in respect of the fairess and effcacy of the Canadian insolvency regime. In applying the provisions of new
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CCAA, Par IV, Canadian cours wil have to pay careful attention to how substantive and procedural rights of stake-holders in Canada wil be affected by the recognition of a foreign main proceeding of a corporate group.
The new CCAA, Par iv provisions appear to contemplate concurent main proceedings, as curently exist in Cana-dian cross-border proceedings. The Calpine case, discussed above, involved concurent main proceedings, splittingthe corporate group into two sets of entities.rFNl331 It seems that as long as there are separate corporate entities thatcan establish the COMI in their respective jursdictions, the cours can recognize concurent main proceedings, evenif the corporate group has operated as a global enterprise.(FN1341
Where corporate group members are all registered in the same jurisdiction, the court can deal with the case on a con-solidated basis or on a jointly administered basis; the creditors are all situated in the jurisdiction and so they haveaccess to the proceeding and can advocate their position. Recognition of a corporate group across borders may de-tract from this access. Concurentjointly admiistered proceedings allow for access, but they can increase adminis-trative and cour costs substantially, leaving fewer assets in the estate to satisfy creditor claims. Where there is asuccessful workout, there may be value added to the insolvent debtor over the long term, but equally, there is therisk of fuher unnecessar depletion of assets. Hence, the fact that the directing mind or command and control are in
one countr may not be sufficient justification to abandon a main proceeding in the jurisdictions of the subsidiaries;to do so could potentially prejudice domestic creditors, paricularly if their claims have higher priority in their ownjurisdiction.
In Canada, the Laidlaw group insolvency was supposed to be addressed through concurent main proceedings, butended up as a main proceeding in the U.S. and ancilar proceeding in Canada. Essentially, the COMI was found tobe in the U.S. and the claims process was drven from there, although the Canadian cour granted recognition ordersin respect of the proceedings and the final plan. Ths proceeding raises a fuher issue of whether corporate govern-ance in a corporate group is congrent with the centre of fiancial interest and oversight. A definition of corporategroup COMI would also have to recognize that even within a corporate group there could be a varety of capitalstrctues that pose paricular challenges for dealing with the insolvency. Moreover, the conflcts may outweigh the
advantages of corporate group recogntion, as in the Calpine case, where the Canadian debtor companies are the
largest creditors of the U.S. debtors.
Assuming recognition of a global integrated unit for puroses of an insolvency proceeding, what are the implica-tions for local directors, who have fiduciar obligations and duties of care under their domestic legislation? Theymay also face personal liabilty to certain classes of creditors for the debts of the subsidiaries under the insolvencylaws in the jurisdiction of the subsidiaries if there are not suffcient assets in the corporation to satisfy these
claims.rFN1351 Nominee directors of a subsidiar may fid it diffcult to make the transition to governance of aglobal unit, even iffinancial control had been at the corporate group level.(FNl361 Equally, local nominee directorswho have not been involved in governance of the corporation, due to the fact that it is par of an integrated corporategroup, may not know how to deal with the fiancial distress of the entity. The directors of each entity within a cor-porate group have a fiduciar obligation to act in the best interests of that entity, which mayor may not align withthe best interests ofthe corporate group as a whole.
Cours may need to be sensitive to the different implications of liquidation and restrctuing proceedings when de-termining a corporate group COMI in a paricular proceeding in Canada. These include: availabilty of creditor rati-fication in restrctuing proceedings; effect on local creditors of aggregation into classes for voting puroses; poten-tially less concern about altering priorities, given that any class so affected may be able to bargain some compensa-tion in exchange for support of the restrctuing proposal; greater concern for local creditor priorities in liquidationproceedings; and greater concern for creating local pools of assets to satisfy local creditors in a liquidation.fFNl371In addition, some liquidations begin life as a restrctuing proceeding and it may be appropriate to revisit the COMIof corporate groups at the point of transition from restrctuing, including going concern sales, to liquidation.
On a pragmatic basis, the high degree of integration of Canada and U.S. capital markets and the integrated natue of
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the capital strctue of Canadian corporations means that there needs to be a workable definition of COM! that ad-
dresses the strctual and operational realities of inter-company debt and movement of assets.rFN1381 While Cana-dian cours wil not be bound to another jursdiction's determination of COM!, it has a long tradition of comity.However, a commitment to international cooperation should not override concern for the rights of domestic stake-holders, paricularly where their interests may be prejudiced.
8. - Conclusion
This aricle has begun to discern the principles being applied by the cours where orders are sought in respect of cor-porate groups in insolvency proceedings. In respect of protocols for corporate groups, operating principles are thenecessity of considering the substantial connection of the entities domestically and to the foreign jurisdiction; andthe need to protect claimants on either side of the border where they may be prevented from asserting their substan-tive rights under the applicable laws of their own jursdictions. While protocols have significant potential to facil-tate cross-border coordination of corporate groups, the cour must be persuaded that they are advancing coordinationand cooperation.
In respect of determining whether consolidation of proceedings should include substantive consolidation, a guidingprinciple is that cours must generally respect entity separateness absent compellng circumstances. An overridingprinciple is that substantive consolidation of proceedings involving corporate groups must be recognized only wherecreditors are not prejudiced in any material way. To date, however, it is unclear whether this principle applies wherea single creditor is materially prejudiced or only where some greater number of creditors is prejudiced. The notion ofmateriality needs fuher ariculation in determing the degree of prejudice that outweighs any benefits of consoli-
dation.
The cours have held that although expediency is an appropriate consideration in deciding whether to grant consoli-dation, it should not be done at the expense of creditors and the cours wil require evidence of the impact of sub-stantive consolidation on creditors. The issue of corporate groups is integrally lined to the issue of centre of maininterests for those states that have adopted the UNCITRA Model Law, come within the EC Regulation or havesimilar statutory language or jursprudence. Cour have recognized the benefits of either procedural or substantialconsolidation. However, in many cases of a corporate group, there wil be multiple COM!, which in tu does notfaciltate a co-ordinated multi-state workout.
Where a corporate group is highly integrated in its fiancial and operational control, proceedings as an integratedenterprise may be appropriate. However, there should be clear criteria for when a cour in one jurisdiction wil rec-ognize such a proceeding. Factors to consider include the following: the extent of integration required to meet a testof highly integrated; the location of control over financial and operational decisions; the degree of strategic planingcontrol; the reasonable expectations and perceptions of paries that have contracted with entities within the corporategroup; conflcts of interest where there is inter-company debt; the potential prejudice to local creditors, employeesand other stakeholders of recogntion of a corporate group proceeding; the jurisdictions of registration, head offceand operations of the entities in the corporate group; and the implications of a global resolution of the fi's finan-
cial distress on domestic provisions governing preferred claims, priorities, preferences or reviewable transactions,set-off and other matters.
Moreover, different considerations may apply to workout or restrctuing proceedings than those applied to liquida-tion, based on the degree to which the former provides creditors with a meangful opportity to consent to ar-rangements that differ from those' provided in their local jurisdictions. In such circumstances, the choice of COMIand the applicable law wil not necessarly be the final determinant of the outcome for creditors as they wil have anopportity to negotiate for and consent to the terms under which their interests wil be dealt with in the restrctu-ing plan. No such opportties are available under liquidation proceedings. These differences may require a recon-
sideration of the issue ofCOMI and the location of main proceeding, as well as the relationship amongst concurentproceedings if the insolvency of a corporate group transitions from a rescue to a liquidation proceeding.
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FNI. Dr. Janis Sara, Professor of Law, University of British Columbia Faculty of Law and Director, National Cen-tre for Business Law. My thanks to Gabriel Vicente, VEC law student, for research on U.S. jurisprudence.
FN2. The issue of corporate groups during insolvency is currently being reviewed by the United Nations Commis-sion on International Trade Law (UNCITRAL), see for example, UNCITRAL, Document NCN.9/618, Report ofthe Working Group V, Vienna, December 2006 and UNCITRAL Draft Report of Working Group V, New York,March 7, 2008, NCN.9/WG.VIXIV/CRP.1.
FN3. The term corporate group comprises parerships, corporations, business trsts, unincorporated businesses, andother entities.
FN4. This aricle is drawn from a much longer earlier aricle by the author, Janis Sara, "Maidum's Challenge, Legaland Governance Issues in Dealing with Cross-Border Business Enterprise Group Insolvencies" (2008) 2 Int'l. Insol-vency Rev. 1 at 3. .
FN5.Ibid, at 4.
FN6.Ibid ¡..,
FN7.Ibid
FN8.UNCITRAL Model Law on Cross-Border Insolvency, U.N. Doc. NRS/52/158 (1997) (Model Law).
FN9.United States Bankruptcy Code, 11 U.S.C. Chapter 15 (2007); Companies' Creditors Arrangement Act, R.S.C.1985, c. C-36, Par IV (CCAA). The new Par iV was enacted by Wage Earner Protection Program Act (Not inforce), S.C. 2005, c. 47, expected to be proclaimed into force during 2008. The amending legislation also enacted aparallel set of provisions relating to cross-border insolvencies in Par XIII of the Bankruptcy and Insolvency Act,R.S.C. 1985, c. B-3 (BIA), but for ease of reference the focus of this aricle wil be on the CCM provisions.
FNIO. Sara, supra, n. 3 at 2.
FNl1.UNCITRA, "Treatment of Enterprise Groups in Insolvency," UNCITRAL Document NCN.9/WG.VIW.80, Report of the Working Group V, Vienna, December 31,2007, at 2-3.
FN12.Ibid
FNl3.Ibid, at 2.
FNI4. See e.g., Loewen Group Inc. Re (2001), (2001) O.J. No. 5640, 32 C.B.R. (4th) 54, 2001 CarswellOnt 4910,22 B.L.R. (3d) 134 (Ont. S.C.J. (Commercial List)); Walker v. Wimbourne (1976), 50 AL.J.R. 446, 3 AC.L.R. 529at 532,137 C.L.R. I (Australia H.C.); Re Enterprise Gold Mines NL (1991),9 AC.L.C. 168,3 AC.S.R. 531 at 540.
FNI5. Randall Morck and Bernard Yeung, Some Obstacles to Good Corporate Governance in Canada and How toOvercome Them, Research Report for the Canadian Task Force to Modernze Canadian Securties Law, InvestmentDealers Association, 2006 at 295.
FNl6.Ibid, at 295.
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FN17. Sara, supra, n. 3 at 7.
FNl8.Ibid.
FN19. Robert Yalden et al., Business Organizations, Principles, Policy and Practice (Toronto: Emond Montgom-ery,2007).
FN20. Sara, supra, n. 3 at 7.
FN21.Ibid
FN22.Ibid
FN23.Ibid
FN24.Ibid., at 8.
FN25.BfA, supra, n. 8; CCAA, supra, n. 8; Jans Sara, "Nortern Lights, Canada's Version of the UNCITRALModel Law on Cross-Border Insolvency" (2007) 16 Intl Insolvency Rev. 1-43 (Nortern Lights).
FN26. Sara, supra, n. 3 at 10.
FN27.UNCITRAL, supra, n. 1 at 3. This defition is a workig defmition, brackets means that there is not yet fullconsensus among the paricipating countres.
FN28.Ibid, at 2.
FN29.Ibid.
FN30.Ibid., at 3.
FN31.Ibid.
FN32.UNCITRA, Treatment of Enterprise Groups in Insolvency, NCN.9/WG.VIW.80/Add.1, UNCITRALWorking Group V (Insolvency Law), Thir-fourh session, 2 Januar 2008 at 2-3.
FN33.Ibid., at 5, 7.
FN34. Sara, supra, n. 3 at 11.
FN35. Janis P. Sara, Rescue! The Companies' Creditors Arrangement Act (Toronto: Carswell, 2007) (Rescue!).EveD after the implementation of An Act to amend the Bankruptcy and Insolvency Act, the Companies' CreditorsArrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005, S.C.2007, c. 36 (Chapter 36), which wil codify DIP fiancing for the fist time, the granting of DIP fmancing wil be
more rule-driven in proceedings under the U.S. Bankruptcy Code than under the BfA or CCAA.
FN36.Chapter 36, ibid.
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FN37. Sarra, supra, n. 3 at 11.
FN38.Rescuef, supra, n. 34.
FN39.Ibid
FN40. Sarra, supra, n. 3 at 12.
FN41.Rescuef, supra, n. 34.
FN42.Ibid
FN43. Sarra, supra, n. 3 at 12.
FN44. See e.g., Cross-Border Insolvency Protocol in re 260networks inc. between, (June 28, 2001) Vancouver CaseNo. L01l792 (B.C. S.C.) (Tysoe J.) and (August 29,2001) S.D.N.Y. Case No. 01-13721-alg (United States Ban-ruptcy Cour) (Hon. Allan L. Gropper), online:-Chtt://www.iiiglobal.org/intemational/protocols/360Cross _Border_Insolvency_Proto col. pdf-.
FN45.Northern Lights, supra, n. 24.
FN46.Muscletech Research & Development Inc., Re (2006), (2006) OJ. No. 462, 2006 CarswellOnt 720, 19 C.B.R.
(5th) 57 (Ont. S.C.I. (Commercial List)) at para. 5.
FN47. Joint hearings were convened in Livent in Ontaro, and in Solv-x. in Alberta. Joint hearings were provided forunder the Loewen protocol, The Loewen Group, Intial Order under the CCAA, (June 1, 1999), Cour File No. 99-CL3304 (Ont. S.C.J. Commercial List).
FN48. Janis Sara, Creditor Rights and the Public Interest, Restrcturing Insolvent Corporations (Toronto: Univer-sity of Toronto Press, 2003).
FN49.Rescuef, supra, n. 34.
FN50.CCAA, supra, n. 8, s. 11.6(6).
FN51.Menegon v. Philp Services Corp. (1999), (1999) OJ. No. 4080, 1999 CarswellOnt 3240,11 C.B.R. (4th) 262,39 C.P.C. (4th) 287 (Ont. S.C.J. (Commercial List)).
FN52.Calpine Canada Energy Ltd, Re, 2007 CarswellAlta 1050,2007 ABQB 504, 35 C.B.R. (5th) 1,415 A.R. 196,33 B.L.R. (4th) 68 (Alta. Q.B.); leave to appeal refused 2007 CarswellAlta 1097, 35 C.B.R. (5th) 27, 410 WAC.25,417 A.R. 25, 2007 ABCA 266, 80 Alta. L.R. (4th) 60, 33 B.L.R. (4th) 94 (Alta. CA (In Chambers)) (Calpine).Calpine Corporation owned, leased or managed 92 natual gas-fired and geothermal plants in the U.S. and Canada. Itsuffered financial distress due to the high price of natual gas, oversupply of electricity, market competition fromless costly but environmentally less friendly coal production, and a large damages award when its bondholders suc-cessfully won a suit.
FN53. Sara, supra, n. 3.
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FN54.Calpine, supra, n. 51.
FN55.Ibid.
FN56. Sara, supra, n. 3 at 15.
FN57.Hunters Trailer & Marine Ltd, Re (2001), 295 AR. 113,2001 ABQB 546, (2001)9 W.W.R. 299, 27 C.B.R.(4th) 236, (2001) AJ. No. 857,94 Alta. L.R. (3d) 389, 2001 CarswellAlta 964 (Alta. Q.B.) at paras. 32-34.
FN58.Ibid, at paras. 18,51.
FN59.80 Wellesley St. East Ltd v. Fundy Bay Builders Ltd, (1972), (1972) OJ. No. 1713, (1972)2 O.R. 280, 25D.L.R. (3d) 386, 1972 CarswellOnt 1010 (Ont. C.A).
FN60. For a fulsome discussion of the cour's exercise of authority under the CCAA, see The Honourable GeorginaJackson & Dr. Janis Sara, "Selecting the Judicial Tool to get the Job Done: An Examination of Statutory Interpreta-tion, Discretionar Power and Inerent Jurisdiction in Insolvency Matters" (Toronto: Carswell, Annual Review of
Insolvency Law, 2007).
FN61.LehndorffGenerai Partner Ltd, Re (1993), (1993) OJ. No. 14, 1993 CarswellOnt 183,9 B.L.R. (2d) 275, 17C.B.R. (3d) 24 (Ont. Gen. Div. (Commercial List)) at para. 21 (Lehndorff. .
FN62. Jackson & Sara, supra, n. 59 at 14.
FN63. Sara, supra, n. 3 at 9.
FN64.Ibid
FN65.Ibid
FN66.Ibid
FN67.Ibid.
FN68. See e.g., Northland Properties Ltd, Re (1988), (1988) B.C.J. No. 1210, 29 B.C.L.R. (2d) 257, 69 C.B.R.(N.S.) 266, 1988 CarswellBC 531, 73 C.B.R. (N.S.) 146 (B.C. S.C.), Northland Properties Ltd, Re, (1989) B.CJ.No. 63, 1989 CarswellBC 334, (sub nom. Northland Properties Ltd v. Excelsior Life Insurance Co. of Canada) 73
C.B.R. (N.S.) 195, (sub nom. Northland Properties Ltd v. Excelsior Life Insurance Co. of Canada) (1989) 3W.W.R. 363, (sub nom. Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada) 34 B.C.L.R. (2d) 122(B.C. C.A) (Northland Properties Ltd); PSINET Ltd Re, (2002), 2002 CarswellOnt 1261, (2002) OJ. No. 1156,33C.B.R. (4th) 284 (Ont. S.C.J. (Commercial List)); Fairview Industries Ltd, Re (1991), 297 AP.R. 12, 109 N.S.R.(2d) 12, 11 C.B.R. (3d) 43, 1991 CarswellNS 35 (N.S. T.D.) (PSINet Ltd); Global Light Telecommunications Inc.,
Re, 33 B.C.L.R. (4th) 155, (2004) B.C.J. No. 1153, 2 C.B.R. (5th) 210, 2004 CarswellBC 1249, 2004 BCSC 745(B.C. S.C.) and Lehndorff supra, n. 60.
FN69. Jacob S. Ziegel, "Corporate Groups and Cross-border Insolvencies: A Canada-United States Perspective"(2002) 7 Fordham J. Corp. & Fin. L. 367.
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FN70. See e.g., A. & F. Bailargeon Express Inc., Re (1993), 27 C.B.R. (3d) 36, 1993 CarswellQue 49 (Que. S.C.)
(A. & F. Bailargeon) where the cour exercised its authority under s. 183 of the BIA to order consolidation; and ReAssociated Freezers of Canada Inc. (1995),36 C.B.R. (3d) 227, 1995 CarswellOnt 944, (1995) OJ. No. 2862 (Ont.Bktcy.); Northland Properties, supra, n. 67. See also Re J.P. Capital Corp. (1995), 31 C.B.R. (3d) 102, 1995
CarswellOnt 53 (Ont. Bktcy.) (J.P. Capital), where the cour recognized its authority to grant consolidation but ex-ercised its discretion not to grant it in the circumstances.
FN71.A. & F. Bailargeon, ibid
FN72.J.P. Capital, supra, n. 69 at para. 18.
FN73.PSINet Ltd, supra, n. 67 at para. 2.
FN74./bid
FN75./bid, at para. 11.
FN76.0ntario (Securities Commission) v. Portus Alternative Asset Management Inc. (2006), 19 C.B.R (5th) 17,2006 CarswellOnt 1724, (2006) O.J. No. 1121 (Ont. S.CJ. (Commercial List)) at para. 3.
FN77.Ashley v. Marlow Group Private Portfolio Management Inc. (2006), 2006 CarswellOnt 3449, 22 C.B.R. (5th)126,270 D.L.R. (4th) 744 (Ont. S.C.J. (Commercial List)); additional reasons at (2006), 2006 CarswellOnt 3419,23C.B.R. (5th) 48 (Ont. S.C.J. (Commercial List)).
FN78. Sara, supra, n. 3 at 18.
FN79.Northland Properties, supra, n. 67.
FN80. See also PSINet Ltd, supra, n. 67. See also J.P. Capital, supra, n. 69, where the cours found that prejudice toone creditor was suffcient to decline to make a consolidation order.
FN81.Global Light Telecommunications Inc., Re, 2004 BCSC 745, 2 C.B.R. (5th) 210, 33 B.C.L.R. (4th) 155,(2004) B.C.J. No. 1153,2004 CarswelilC 1249 (B.C. S.C.).
FN82. In Re Owens Corning, 419 F.3d 195,45 Ban.Ct.Dec. 36 (3rd Cir. 2005), citig in Re Commercial EnvelopeMfg. Co., 3 Ban.Ct.Dec. 647 at 648, 1977 WL 182366 (Bank.Ct.Dec.) (Ban.S.D.N.Y., 1977). The cours have
relied on §105(c); §1123(a)(5)(C) of the U.S. Bankruptcy Code to find authority. See e.g., Soviero v. National Bankof Long Island, 328 F.2d 446 (2d Cir., 1964); Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 1967A.M.C. 357 (U.S. 2nd Cir. N.Y., 1966); Flora Mir Candy Corp. v. R.S. Dickson & Co. (In re Flora Mir CandyCorp.), 432 F.2d 1060 (2d Cir., 1970); Talcott v. Wharton (In re Continental Vending Machine Corp.), 517 F.2d 997(2d Cir., 1975); In re AugieiRestivo, 860 F.2d 518,18 Ban.Ct.Dec. 852; In re Auto-Train Corp, Inc., 810 F.2d 270,Ban. L. Rep. P 71,618 (In re Auto-Train). For a discussion of developments in the U.S., see Mar Kors, "AlteredEgos: Deciphering Substantive Consolidation" (1998) 59 U. Pitt. L. Rev. 381; Douglas Baird, "Substantive Consoli-dation Today" (2005) 47 B.C. L. Rev. 5 at 15; and T. Graulich, "Substantive Consolidation - A Post-ModemTrend" (2006) 14 Am. Ban. Inst. L.R. 527.
FN83./n re Owens Corning, supra, n. 81 at 206.
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FN84.In re Vecco Construction Industries, Inc., 4 B.R. 407, 6 Ban.Ct.Dec. 461 (Ban. E.D. Va., 1980); Fish v.East, 114 F.2d 177 (10th Cir., 1940).
FN85.In re Owens Corning, supra, n. 81 at 210-211, reversing 316 B.R. 168 (D. DeL., 2004). The lower cour hadapproved substantive consolidation, but it was subsequently overted on appeaL.
FN86. The latter are better addressed by the avoidance provisions, ibid.
FN87.Ibid., at 216.
FN88.In re Auto-Train, supra, n. 81 at 276. See also In re Augie/Restivo, supra, n. 81.
FN89.CCAA, supra, n. 8, ss. 45, 268, as amended by Chapter 36, supra, n. 34. Foreign non-main proceeding is de-fined differently than the Model Law and Chapter 15. The Canadian provisions define foreign non-main proceedingas a foreign proceeding, other than a foreign main proceeding. In contrast, the Model Law and Chapter 15 requirethat the debtor have an establishment within the jurisdiction of a foreign non-main proceeding, defined as any placeof operations where the debtor caries out a non-transitory economic activity with human means and goods or ser-vices; Model Law, supra, n. 7, Ars. 2(c) and (f), 17(2)(b); U.S. Bankruptcy Code, supra, n. 8, §1502(5).
FN90.UNCITRAL Legislative Guide on Insolvency Law, United Nations, (New York, 2005) at 4,41, citig the EC,Council Regulation (EC) 1346/2000 of 29 May 2000 on Insolvency Proceedings, (2000) 0.1. L 160/1 (EC Regula-tion). The guide is which is aimed at establishing an effective insolvency framework; online:-chtt://www.iiiglobal.org/organations/uncitraI/2003 _ Vienna _ Report.PDF~.
FN91.UNCITRAL Workig Group V, "0657458 Treatment of corporate groups in insolvency Note by the Secre-tarat", working discussion document, December 2006 at 3. The UNCITRAL Workig Group has observed that theModel Law recognizes that the status of proceedigs as main proceedings may change given where a corporationlocates its principal activities and accordingly, that the order for recognition may need to be modified or tenninated.
FN92. Sara, supra, n. 3 at 20.
FN93.Creative Building Maintenance Inc (Ontario) and Creative Building Maintenance Inc. (Delaware), (21 No-vember 2006) Western Distrct of New York 06-03587 (U.S. Banptcy Cour); In re: Norshield Asset Manage-ment (Canada), Ltd., a/lda Norshield Financial Group, Norshield Investment Partners Holdings Ltd., (28 June
2006) Mineapolis BKY 06-40997 (U.S. Banptcy Cour) (In re: Norshield Asset); Olympus United Fund Hold-ings Corporation, a/lda First Horizon Holdings Ltd., (28 June 2006) Minesota BKY 06-40997 (U.S. BanptcyCour) pursuant to 11 U.S.C. §1515; In re: Mount Real Corporation, Order recognizing MRCS Management Ltd.,Foreign Main Proceeding, a/lda Mount Real Acceptance Corporation; Real Vest Investment Ltd., BKY 06-41636;Real Assurance Acceptance Corporation, a/lda Mount Real Assurance Acceptance Corporation, (6 September 2006)Minesota BKY 06-41636 (U.S. Banptcy Cour) (Chapter 15 Recogntion Order). The U.S. Bankruptcy Codeprovides that a foreign proceeding for which Chapter 15 recognition is sought must be recognized as a foreign mainproceeding if it is pending in the countr where the debtor has the centre of its main interests; 11 U.S.C. §1517(b)(1); 9165-7999 Québec Inc., aka les Productions Sky High Vikings Inc., (22 August 2006) Northern Distrctof Ilinois 06B-07875 (U.S. Banptcy Cour) (Chapter 15, Recognition Order).
,"','
FN94.Creative Building Maintenance Inc., supra, n. 92, Chapter 15 Order directing joint administration of relatedcases, recognizing the interim receiver in a proceeding before the Ontario Superior Cour of Justice under the BIA;9165-7999 Québec Inc., aka les Productions Sky High Vikings Inc., ibid., recognizing a trstee and proceeding be-fore the Québec Superior Cour, where the cour held that the COMI was Canada and that it was a foreign main pro-ceeding pursuant to § 1502(4) and entitled to recognition pursuant to §1517(b)(1) and relief under §1520; In re: Nor-
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shield Asset, supra, n. 92.
FN95.Muscletech Research & Development Inc., Re (2006), (2006) OJ. No. 167, 19 C.B.R. (5th) 54, 2006 Carswel-10nt 264 (Ont. S.CJ. (Commercial List)) and Muscletech Research & Development Inc., Re, supra, n. 45.
FN96.Muscletech Research & Development Inc., Re, supra, n. 94 at para. 4.
FN97.In re Ephedra Products Liabilty Litigation, In re Muscletech Research and Development, Order of Judge
Rakoff 04 MD 1598, 06 Civ. 538 (S.D.N.Y.).
FN98. The U.S. Court held that pursuant to § 105(a) and § 1521(a) of the U.S. Bankruptcy Code, the cour is permit-ted in a Chapter 15 proceeding to grant any appropriate relief necessary to effectuate the purose of the chapter andto protect the assets of the debtors or the interests of creditors, ibid
FN99.Re SPinX Ltd, S.D.N.Y. Case No. 06-11760.
FNIOO. At least 90% of the SPin Funds approximately $500 milion in assets are located in accounts in the U.S.,and investors are located thoughout the world, ibid
FNI 0 1. Sara, supra, n. 3 at 30.
FN102.Bear Stearns High-Grade Structured Credit Strategies Master Fund, (5 September 2007) S.D.N.Y. Case No.07-12383 (U.S. Banptcy Cour).
FN103.Ibid, at2.
FN104.Ibid, at 8, citing H.R. REP. NO. 31, 109th Cong., 1st Sess. 1516 (2005).
FN105.Ibid, citing H.R. REP. NO. 109-31, 112-13 (2005). Judge Lifland held that the presumption in the absenceof evidence to the contrar was changed from "proof' of the Model Law to make it clearer using United States ter-minology that the ultimate burden is on the foreign representative.
FN106. The Cour held that the prelimar injunction order of August 9,2007, issued pursuant to §1519 was toremain in effect for a period 000 days so as to give paries in interest an opportity to fie a petition for relief un-der chapters 7 or 11 of the Bankruptcy Code in the district where the seat of the Funds' management fuctions werelocated and in the event that there are no such fiings, the injunction order of August 9, 2007 was to automaticallydissolve upon expiration of the 30 day period, ibid, at 16.
FN107. Sara, supra, n. 3 at 31.
FN108.EC Regulation, supra, n. 89, in force May 2002. The EC Regulation is subordinate legislation under theTreaty Establishing the European Community (the EC Treaty) and is binding in its entirety on, and has general anddirect applicabilty in, all Member States except Denmark, a total of24 countries, EC, Treaty Establishing the Euro-pean Community (Consolidated Version 2002), (2002) O.J. C 325/33 (EC Treaty).
FN109.EC Treaty, ibid, Ars. 220, 234, the European Cour of Justice has the authority to determine conflcts aris-ing out of different interpretive approaches to the Regulation among the Member States. The EC Regulation doesnot apply to Denmark; for a discussion of the historical reasons for this exemption, see Ian F. Fletcher, Insolvency inPrivate International Law, 2d Ed., (Oxford: Oxford University Press, 2005), at para. 7.24-27 and 7.142.
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FNllO. Fletcher, ibid., at 7.36; Virgos-Schmit Report, contained as appendix to Fletcher, ibid., at para. 49(c).
FNll1.EC Regulation, supra, n. 89, Recital 13. Proceedings (Offcial Joural L 160 of 30 June 2000), consolidatedtext, as it stands after the accession of 10 States to the EU, based on Aricle 20 Act of Accession (Offcial Joural L236 of23 September 2003, Anex II, paragraph 18, A(l), and after the accession of Bulgara and Romania as perJanuary 1,2007 (Offcial Joural L 363 of20 December 2006).
FNI12.Ibid., Recital 14.
FNl13. The Regulation fuher specifies that prior to the opening of the main insolvency proceedings, the right torequest the opening of insolvency proceedings in the Member State where the debtor has an establishment should belimited to local creditors and creditors of the local establishment or to cases where main proceedings cannot beopened under the law of the Member State where the debtor has the centre of its main interests. Ibid., Recital 17.
FNl14. Fletcher, supra, n. 108 at 7.46.
FNI15.Ibid., Aricles 28,3(2) and 27.
FNlI6.EC Regulation, supra, n. 89, Aricle 2(h). The Regulation contains a narow public policy exception, in thatany Member State may refuse to recognse insolvency proceedings opened in another Member State or to enforce ajudgment handed down in the context of such proceedings where the effects of such recogntion or enforcementwould be manifestly contrar to that State's public policy, in parcular, its fudamental principles or the constitu-tional rights and liberties ofthe individual, Aricle 26(1).
FNI17.Ibid., Aricle 4(2)(a)-(m). The law of the State of the opening of main proceedings shall determine the condi-tions for the opening, conduct, and closure of those proceedigs, including, specified substantive and procedural
matters.
FN118. Sara, supra, n. 3 at 35.
FNl19.Eurofood IFSC Ltd., Judgment of the European Cour of Justice (Grand Chamber) (May 2,2006) EuropeCase C-341/04, (2004) 0.1. C 251/7, at para. 37; Eurofood was registered in Ireland in 1997, with its registered of-fice in Dublin. It is a 'wholly owned subsidiar of Paralat SpA, registered in Italy, online: ~htt://eur-lex.europa.eu::. In the matter of Eurofood IFSC Ltd. and in the matter of the Companies Act 1963 to 2003, EnricoBondi against Bank of America N.A., Pearse Farrell (the Offcial Liquidator), Director of Corporate Enforcementand the Certifcate/Note holders, E.C.J. C-341/04, 2006 ECJ CELEX LEXIS 199 (Lexis).
FN120.Ibid., at para. 30.
FN121. Prior to the ECl decision in Eurofood IFSC Ltd., European cours had considered the following factors inrebutting the presumption that the COMI is located in the jurisdiction in which the debtor is registered: location ofmanagement and policy decision-making; financial arangements between parent and subsidiar; the extent of a sub-sidiar's independence with respect to fiancial decisions; the location of ban accounts and accountancy services;
the division of responsibilty; and conduct of offce fuctions. For example, in Crisscross Telecommunications
Group, the UK cour found that the COMI of the entie corporate group was located in the UK, including thoseentities that were registered in several EC Member States as well as Switzerland under a command and controlanalysis. Ibid. See also Hettlage-Austria, (4 May 2004) Munch District Cour, AG Munchen, Beschl V.4.5.2004-1501 IE 1276/04, online: ~www.eir-database.com::. Eurfoods supersedes this earlier case law.
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FNI22.BenQ Mobile GmbH & Co. OHG fa tradingpartnershipj and BenQ Mobile Holding B. V, (5 Februar 2007)Munich 1503 IE 4371/06.
FN123. (31 Januar 2007) Suspension no. 06/34-S, FT RK 07-93, FT RK 07-122 (District Cour of Amsterdam,Civil law section) at 5.
FNl24. The Cour noted that Citibank N.A., London, Deutsche Ban AG, Amsterdam, Deutsche Bank Polska SA,the Deutsche Ban AG branch in Munich, Deutsche Ban S.p.A., Milan, Deutsche Ban (portgal) S~A., and Citi-ban International PLC Netherlands each sent account statements and letters to the Debtor at its Munich address.
FN125. Sara, supra, n. 3 at 37.
FN126.Ibid
FN127.Ibid
FNl28.Digest of Financing Provisions from Cross-Border Insolvency Protocols, International Insolvency Institute,online: -ohtt://ww.iiiglobaLorg;:; Financing in Insolvency Proceedings (Scottsdale: INSOL, 2006).
FN129. Model Law, supra, n. 7 at 6.
FN130.Ibid, citing Gabriel Moss & Christoph Paulus, "The Urgent Need for Reform - What and When? CurentTrends in European Rescue and the Impact of the European Insolvency Regulation," (15 July 2005).
FN13l.bid, at 6.
FN132. Sara, supra, n. 3 at 40.
FN133. See the discussion at note 52.
FN134. In Calpine, the cours did not have occasion to consider the COMI of two sets of corporate groups.
FNl35. Sara, supra, n. 3 at 35.
FN136.Ibid
FN137.Ibid, at 39.
FN138.Ibid
END OF DOCUMNT
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53
This is Exhibit "C" referred to inthe Affdavit of Allys on Roy swornbefore me ths 8th day of April2010.
Douglas B. B. Stewart
54United Nations AfCN.9/WG.VfWP.73
General Assembly Distr.: Limited22 September 2006
Original: English
United Nations Commissionon International Trade Law
Working Group V (Insolvency Law)Thirt-first session
Vienna, 11-15 December 2006
Annotated provisional agenda for the thirty-first session ofWorking Group V (Insolvency Law)
I. Provisional agenda
1. Opening of the session.
2. Election of offcers.
3. Adoption of the agenda.
4. Consideration of the treatment of corporate groups in insolvency.
5. Other business.
6. Adoption of the report of the Working Group.
II. Composition of the Working Group
I. The Working Group is composed of the following States: Algeria, Argentina,Australia, Austria, Belarus, Belgium, Benin, Brazil, Cameroon, Canada, Chile,China, Colombia, Croatia, Czech Republic, Ecuador, Fiji, France, Gabon, Germany,Guatemala, India, Iran (Islamic Republic of), Israel, Italy, Japan, Jordan, Kenya,Lebanon, Lithuania, Madagascar, Mexico, Mongolia, Morocco, Nigeria, Pakistan,Paraguay, Poland, Qatar, Republic of Korea, Russian Federation, Rwanda, Serbia,Sierra Leone, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
Thailand, the former Yugoslav Republic of Macedonia, Tunisia, Turkey, Uganda,
United Kingdom of Great Britain and Northern Ireland, United States of America,Uruguay, Venezuela (Bolivarian Republic of) and Zimbabwe.
2. In addition, States that are not members of the Commission, as well as relevant
intergovernmental and international non-governmental organizations, may beinvited to attend the session as observers. In accordance with established
V.06-57197 (E)
1111~I11111 11111 iim 1~i11111111111 iim IIII
55AlCN.9/WG.V/WP.73
UNCITRAL practice, observer delegations may participate actively in thedeliberations leading to decisions, which are taken by consensus.
III. Annotations to agenda items
Item 1. Opening of the session
3. The thirty-first session of Working Group V (Insolvency Law) is scheduled to
be held at the Vienna International Centre, from I I-IS December 2006. Meetinghours wil be from 9.30 a.m. to 12.30 p.m., and from 2 p.m. to 5 p.m., except onMonday, I I December 2006, when the session wil commence at 10 a.m.
Item 2. Election of offcers
4. In accordance with its practice at previous sessions, the Working Group may
wish to elect a Chairman and a Rapporteur.
Item 4. Consideration of the treatment of corporate groups in insolvency
5. At its thirty-eighth session (2005), the Commission had before it a number of
proposals (A/CN.9/582 and Add.I-7), on which it heard presentations, for futurework in the area of insolvency law, specifically on treatment of corporate groups ininsolvency, cross-border insolvency protocols in transnational cases,post-commencement financing in international reorganizations, directors' andofficers' responsibilities and liabilities in insolvency and pre-insolvency cases, andcommercial fraud and insolvency.
6. After discussion, some preference for the topics of corporate groups,
cross-border protocols and post-commencement financing was expressed.! TheCommission agreed that to facilitate further consideration and obtain the views andbenefit from the expertise of international organizations and insolvency experts, aninternational colloquium should be held, similar to the UNCITRALIISOLInternational/International Bar Association Global Insolvency Colloquium (Vienna,4-6 December 2000), which had been a key part of the work on the development ofthe UNCITRAL Legislative Guide on Insolvency Law (see A/CN.9/495). TheCommission agreed that in preparing the programme and determining the prioritiesfor a colloquium, to be held in Vienna from 14 to 16 November 2005, the
Secretariat should take into account the discussion of the various topics in theCommission.
7. At its thirty-ninth session (2006), the Commission had before it a note by the
Secretariat (A/CN.9/596) reporting on the international colloquium that took placefrom 14 to 16 November 2005.
8. With respect to the proposals made by the Secretariat for possible future work,the Commission recalled, in particular, that treatment of corporate groups ininsolvency had arisen in the context of the development of the UNCITRALLegislative Guide on Insolvency Guide, and that the treatment in the InsolvencyGuide was either limited to a brief introduction, as in the case of treatment ofcorporate groups in insolvency, or limited to domestic insolvency law, as in the case
2
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AlCN.9fWG.VfWP.73
of post-commencement financing. It was acknowledged that undertaking furtherwork on those two topics would build upon and complement the work already
completed by the Commission. The Commission also noted that the proposal oncross-border insolvency protocols was closely related and complementary to thepromotion and use of a text already adopted by the Commission, the Model Law onCross-Border Insolvency,2 which had been enacted by 11 States and was the subjectof increasing interest and discussion. It was therefore appropriate to consider howimplementation of the coordination and cooperation provisions of the Model Lawcould be faciltated by making the legal and judicial experience with respect to thenegotiation, use. and content of protocols available, in some form, to theinternational legal community.
9. After consideration, the Commission agreed that:
(a) The treatment of corporate groups in insolvency was sufficientlydeveloped for the topic to be referred to Working Group V (Insolvency Law) forconsideration in 2006 and that the Working Group should be given the flexibilty tomake appropriate recomm'endations to the Commission regarding the scope of itsfuture work and the form it should take, depending upon the substance of theproposed solutions to the problems the Working Group would identify under thattopic;
(b) Post-commencement financing should initially be considered as acomponent of work to be undertaken on insolvency of corporate groups, with theWorking Group being given sufficient flexibilty to consider any proposals for workon additional aspects of the topic;
(c) Initial work to compile practical experience with respect to negotiating
and using cross-border insolvency protocols should be faciltated informally throughconsultation with judges and insolvency practitioners. A preliminary progress reporton that work should be presented to the Commission for further consideration at itsfortieth session, in 2007;
(d) The Secretariat should have flexibilty to organize the work to beundertaken with respect to topics (b) and (c), as appropriate, in view of limitedresources;
(e) Work being undertaken by other organizations in relation to the topics ofdirectors' and officers' responsibilities in insolvency and pre-insolvency, andinsolvency and commercial fraud should be monitored to facilitate consideration, atsome future date, of work that might be undertaken by the Commission.
Documentation for the 31st session
10. The Working Group wil have before it, and may wish to use as a basis for itsconsideration a note by the Secretariat concerning the treatment of corporate groupsin insolvency, including both domestic and international treatment(A/CN.9/WG.V/WP.74 and Add.I).
11. In planning the attendance of their representatives, States and interestedorganizations may wish to note that the documents listed in paragraph 10 draw onsections of the following background documents (to facilitate reference, specificparagraph and article numbers are included in the documents referred to inpara. 10):
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57A1CN.9IWG.VIWP.73
(a) A note concerning developments in insolvency law, including the use ofcross-border protocols and court-to-court commùnication guidelines; and case lawon interpretation of "centre of main interests" and "establishment" in the EuropeanUnion (NCN.9/580);
(b) A note concerning proposals for possible future work in the area ofinsolvency law (NCN .9/582 and Add. 1 -7);
(c) A note concerning possible future work in the area of insolvency law and
reporting on the international colloquium held in November 2005 (A/CN.9/596);
(d) A note concerning developments in insolvency law, including ininterpretation of the "centre of main interests" in the European Union
(NCN.9/597);
(e) The UNCITRAL Model Law on Cross-Border Insolvency (1997); and
(f) The UNCITRAL Legislative Guide on Insolvency Law (2004).
12. UNCITRAL documents are posted on the UNCITRAL website(http://www.uncitral.org) upon their issuance in all the offcial languages of theUnited Nations. Delegates may wish to check the availabilty of the documents byaccessing the Working Group's page in the "Commission and Working GroupsDocuments" section of the UNCITRAL website.
Item 6. Adoption of the report
13. The Working Group may wish to adopt, at the close of its session, on Friday,15 December 2006, a report for submission to the fortieth session of theCommission (planned to be held in Vienna, from 18 June to 13 July 2007). Themain conclusions reached by the Working Group at its ninth half-day meeting (thatis, on the morning of Friday, 15 December) wil be summarily read out for therecord by the Chairman at the tenth half-day meeting and subsequently incorporatedinto the Working Group's report.
iv. Scheduling of meetings
14. The Working Group's thirt-first session wil last for five working days. Therewil be ten half-day meetings available for consideration of the agenda items. The
Working Group may wish to note that, consistent with decisions taken by theCommission at its thirt-fourth session,3 the Working Group is expected to holdsubstantive deliberations during the first nine half-day meetings (that is, from
Monday to Friday morning), with a draft report on the entire period being preparedby the Secretariat for adoption at the tenth and last meeting of the Working Group(on Friday afternoon).
Notes
i Official Records of the General Assembly, Sixtieth Session, Supplement No. 17 (A/601l7),paragraph 210.
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2 Ibid., Fifty-second Session, Supplement No. 17 (A/52/17), annex I, and United Nationspublication, Sales No. E.99.Y.3, which contains also the accompanying Guide to Enactment.
3 Offcial Records of the General Assembly. Fifty-sixth Session, Supplement No. 17 andcorrigendum (A/56/17 and Corr.), paragraph 381, available on the UNClTRAL website under"Commission and Working Groups Documents" on the left side, then "Commission Sessions"and then "34th session, 25 June-13 July 2001, Vienna".
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This is Exhibit "D" referred to inthe Affidavit of Allyson Roy swornbefore me this 8th day of April,2010.
alsi;;E:
.. ~ .
60
U nIted Nations AlCN.9/WG.V/WP.91
(~. 'General Assembly~~ Distr.: Limited13 January 2010
Original: English
United Nations Commission onInternational Trade LawWorking Group V (Insolvency Law)Thirty-eighth session
New York, 19-23 April 2010
Annotated provisional agenda for the thirt-eighth sessionof Working Group V (Insolvency Law)
I. Provisional agenda
1. Opening of the session.
2. Election of offcers.
3. Adoption of the agenda.
4. Consideration of the treatment of enterprise groups in insolvency and future
work.
5. Other business.
6. Adoption of the report of the Working Group.
II. Composition of the Working Group
1. The Working Group is composed of the following States: Algeria, Armenia,Australia, Austria, Bahrain, Belarus, Benin, Bolivia (Plurinational State of),Bulgaria, Cameroon, Canada, Chile, China, Colombia, Czech Republic, Ecuador,Egypt, El Salvador, Fiji, France, Gabon, Germany, Greece, Guatemala, Honduras,India, Iran (Islamic Republic of), Israel, Italy, Japan, Kenya, Latvia, Lebanon,Madagascar, Malaysia, Malta, Mexico, Mongolia, Morocco, Namibia, Nigeria,Norway, Pakistan, Paraguay, Poland, Republic of Korea, Russian Federation,Senegal, Serbia, Singapore, South Africa, Spain, Sri Lanka, Switzerland, Thailand,
Uganda, United Kingdom of Great Britain and Northern Ireland, United States ofAmerica, Venezuela (Bolivarian Republic of) and Zimbabwe.
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2. States not members of the Commission and international governmentalorganizations may attend the session as observers and participate in thedeliberations. In addition, invited international non-governmental organizations mayattend the session as observers and represent the views of their organizations on
matters where the organization concerned has expertise or international experienceso as to faciltate the deliberations at the session.
III. Annotations to agenda items
Item 1. Opening of the session
3. The thirt-eighth session of Wòrking Group V (Insolvency Law) is scheduled
to be held in New York from 19-23 April 2010. Meeting hours wil be from10:00 a.m. to I :00 p.m. and from 3:00 p.m. to 6:00 p.m., except on Monday,
19 April 2010, when the session wil commence at 10:30 a.m.
Item 2. Election of offcers
4. In accordance with its practice at previous sessions, the Working Group may
wish to elect a Chairman and a Rapporteur.
Item 4. Consideration of the treatment of enterprise groups in insolvency
1. Previous deliberations
5. At its thirt-eighth session (2005), the Commission had before it a number of
proposals (A/CN.9/582 and Add.I-7), on which it heard presentations, for futurework in the area of insolvency law, specifically on treatment of corporate groups ininsolvency, cross-border insolvency protocols in transnational cases, post-commencement finance in international reorganizations, directors' and offcers'responsibilties and liabilties in insolvency and pre-insolvency cases, and
commercial fraud and insolvency.
6. After discussion, some preference for the topics of corporate groups, cross-
border protocols and post-commencement financing was expressed.l The
Commission agreed that to facilitate further consideration and obtain the views andbenefit from the expertise of international organizations and insolvency experts, an
international colloquium should be held. The Commission agreed that in preparingthe programme and determining the priorities for a colloquium, to be held in Viennafrom 14 to 16 November 2005, the Secretariat should take into account thediscussion of the various topics in the Commission.
7. At its thirt-ninth session (2006), the Commission had before it a note by the
Secretariat (NCN.9/596) reporting on the international colloquium that took placefrom 14 to 16 November 2005.
8. With respect to the proposals made by the Secretariat for possible future work,
the Commission recalled, in particular, that treatment of corporate groups ininsolvency had arisen in the context of the development of the UNCITRAL
i Offcial Records of the General Assembly, Sixtieth Session, Supplement No. 17 (A/60/l7),
paragraph 210.
2
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Legislative Guide on Insolvency Law, and that the treatment in the InsolvencyGuide was either limited to a brief introduction, as in the case of treatment ofcorporate groups in insolvency, or limited to domestic insolvency law, as in the caseof post-commencement financing. It was acknowledged that undertaking furtherwork on those two topics would build upon and complement the work already
completed by the Commission. The Commission also noted that the proposal oncross-border insolvency protocols was closely related and complementar to thepromotion and use of a text already adopted by the Commission, the UNCITRALModel Law on Cross-Border Insolvency (the Model Law)? which was the subjectof increasing interest and discussion. It was therefore appropriate to consider how'implementation nf the coordination and cooperation provisions of the Model Lawcould be facilitated by making the legal and judicial experience with respect to thenegotiation, use and content of protocols available, in some form, to theinternational legal community.
9. After consideration, the Commission agreed that:
(a) The treatment of corporate groups in insolvency was suffcientlydeveloped for the topic to be referred to Working Group V (Insolvency Law) forconsideration in 2006 and that the Working Group should be given the flexibilty tomake appropriate recommendations to the Commission regarding the scope of itsfuture work and the form it should take, depending upon the substance of theproposed solutions to the problems the Working Group would identify under thattopic;
(b) Post-commencement finance should initially be considered as acomponent of work to be undertaken on insolvency of corporate groups, with theWorking Group being given suffcient flexibilty to consider any proposals for workon additional aspects of the topic;
(c) Initial work to compile practical experience with respect to negotiating
and using cross-border insolvency protocols should be facilitated informally throughconsultation with judges and insolvency practitioners. A preliminary progress reporton that work should be presented to the Commission for further consideration at itsfortieth session, in 2007;
(d) The Secretariat should have flexibility to organize the work to beundertaken with respect to topics (b) and (c), as appropriate, in view of limitedresources;
(e) Work being undertaken by other organizations in relation to the topics ofdirectors' and offcers' responsibilties in insolvency and pre-insolvency, and
insolvency and commercial fraud should be monitored to faciltate consideration, atsome future date, of work that might be undertaken by the Commission.
10. The Working Group commenced its consideration of the treatment of corporategroups in insolvency at its thirt-first session in December 2006, on the basis of anote by the Secretariat covering both domestic and international treatment ofcorporate groups (A/CN.9/WG.V/WP.74 and Add.l and 2).
2 Ibid., Fifty-second Session, Supplement No. 17 (A/52/17), annex I, and United Nationspublication, Sales No. E.99.V.3, which also contains the accompanying Guide to Enactment.
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A/CN.9/WG.V/WP.91
11. The Working Group continued its consideration of the treatment of corporategroups in insolvency at its thirty-second session in May 2007, on the basis of notesby the Secretariat covering both domestic and international treatment of corporategroups (A/CN.9/WG.V/WP.76 and Add.l). For lack of time, the Working Groupdid not discuss the international treatment of corporate groups contained in
document AlCN .9/W G. V /WP. 76/ Add.2.
12. At its fortieth session (2007), the Commission noted the Working Group's
progress regarding consideration of the treatment of corporate groups in insolvencyas reflected in the reports of the Working Group's thirty-first (Vienna,11-15 December 2006) and thirty-second (New York, 14-18 May 2007) sessions(A/CN.9/618 and A/CN.9/622, respectively) and reaffrmed that the mandate of theWorking Group was to consider the treatment of corporate groups in insolvency,with post-commencement finance to be included as a component of that work.3
13. The Commission took note of the Working Group's agreement at its thirty-firstsession that the UNClTRAL Legislative Guide on Insolvency Law and theUNCITRAL Model Law on Cross-Border Insolvency provided a sound basis for theunification of insolvency law and that the current work on corporate groups wasintended to complement those texts, not to replace them (A/CN.9/618, para. 69).The Commission further noted the suggestion made at that session of the WorkingGroup that a possible method of work entailed consideration of the provisionscontained in those existing texts that might be relevant in the context of corporategroups and the identification of those issues that required additional discussion andthe preparation of additional recommendations.4
14. The Commission also noted concerns expressed with respect to somecomponents of that work, in particular substantive consolidation and its effect onthe separate identity of individual members of a corporate group and the possibiltyof submitting a solvent member of a corporate group to collective procedures, andrequested the Working Group to bear them in mind in its deliberations.s
15. The Working Group continued its consideration of the treatment of enterprisegroups6 in insolvency at its thirt-third (November 2007), thirt-fourth
(March 2008), thirty-fifth (November 2008), thirt-sixth (May 2009) andthirty-seventh (November 2009) sessions, on the basis of notes by the Secretariat(A/CN.9/WG.V/WP.78 and Add.l, A/CN.9/WG.V/WP.80 and Add.1,A/CN.9/WG.V/WP.82 and Add.l-3, A/CN.9/WG.V/WP.85 and AlCN.9/WG.V/WP.90covering domestic issues; AlCN.9/WG. V /wP. 76/ Add.2, AlCN.9/WG. V /WP.82/ Add.4,
AlCN.9/WG.V/WP.85/Add.1 and AlCN.9/WG.V/WP.90/Add.1 covering internationalissues).
3 Offcial Records of the General Assembly, Sixty-second Session. Supplement No. 17 (A/62/l7),
paragraphs 186-187.4 Ibid., paragraph 188.S Ibid., paragraph 189.6 At its thirt-third session, the Working Group adopted the term "enterprise groups", which is
explained in the glossary included in documentA/CN.9/WG.V/WP.92.
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2. Future work
16. The Working Group started a preliminary discussion on possible future workat its previous session in November 2009 (see Report of Working Group V(Insolvency Law) on the work of its thirty-seventh session, document A/CN.9/686,paras. 126-131). Topics suggested for future work included an internationalinsolvency convention, liabilty of directors and offcers of enterprises in insolvencyor in proximity to insolvency, insolvency of banks and financial institutions, theconcept of centre of main interests (COMI) of an enterprise and the factors relevantto its determination, as well as issues of jurisdiction and recognition. The discussionon future work will be continued, pursuant to the Working Group's decision at itsthirty-seventh session (see A/CN.9/686, para. 131), at the present session.
3. Documentation for the thirt-eighth session
17. The Working Group wil have before it, and may wish to use as a basis for itsconsideration, notes by the Secretariat concerning (a) the treatment of enterprise
groups in insolvency (A/CN.9/WG.V/WP.92 and addenda, as applicable) and(b) future work (A/CN.9/WG.V/WP.93 and addenda, as applicable).
18. In planning the attendance of their representatives, States and interestedorganizations may wish to note the following background documents:
(a) Notes by the Secretariat concerning the treatment of enterprise
groups in insolvency (NCN.9/WG.V/WP.74 and Add. 1-2, NCN.9/WG.V/WP.76and Add. 1-2, NCN.9/WG.V/WP.78 and Add.l, NCN.9/WG.V/WP.80 andAdd I, NCN.9/WG.V/WP.82 and Add.!-4, NCN.9/WG.V/WP.85 and Add.!,NCN.9/WG.V/WP.90 and Add. 1-2);
(b) Reports of Working Group V (Insolvency Law) on the work of itsthirty-first to thirt-seventh sessions (NCN.9/618, A/CN.9/622, NCN.9/643,A/CN.9/647, NCN.9/666, A/CN.9/67I and NCN.9/686);
(c) The UNCITRAL Model Law on Cross-Border Insolvency (1997);
(d) The UNCITRAL Legislative Guide on Insolvency Law (2004); and
(e) If available in published format, the final text of the UNCITRAL PracticeGuide on Cross-Border Insolvency Cooperation (2009).
19. UNCITRAL documents are posted on the UNCITRAL website(http://www.uncitral.org) upon their issuance in all the offcial languages of the
United Nations. Delegates may wish to check the availability of the documents byaccessing the Working Group's page in the "Commission and Working GroupsDocuments" section of the UNCITRAL website.
20. Delegates may wish to note that only a very limited number of copies of theUNCITRAL Legislative Guide on Insolvency Law wil be available at thethirty-eighth session of the Working Group. The Glossary and Recommendations ofthe Legislative Guide wil be made available separately for the information ofparticipants.
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Item 6. Adoption of the report
21. The Working Group may wish to adopt, at the close of its session, on Friday,23 April 2010, a report for submission to the forty-third session of the Commission(planned to be held in New York, from 21 June to 9 July 2010). The mainconclusions reached by the Working Group at its ninth half-day meeting (that is, onthe morning of Friday, 23 April 2010) wil be summarily read out for the record atthe tenth half-day meeting and subsequently incorporated into the Working Group'sreport.
~ Scheduling of meetings
22. The Working Group's thirt-eighth session wil last for five working days. TheWorking Group may wish to note that, consistent with decisions taken by theCommission at its thirty-fourth session? the Working Group is expected tohold substantive deliberations during the first nine half-day meetings (that is,from Monday to Friday morning), with adoption of the report, as noted above, at thetenth and last meeting of the Working Group (on Friday afternoon).
7 Offcial Records of the General Assembly, Fifty-sixth Session, Supplement No. 17 andcorrigendum (N56/l7 and Corr.), paragraph 381, available on the UNCITRAL website under"Commission and Working Groups Documents" on the left side, then "Commission Sessions"and then "34th session, 25 June-13 July 2001, Vienna".
6
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This is Exhibit "E" referred to inthe Affidavit of Allyson Roy swornbefore me this 8th day of April,2010.
~E:C.=Douglas B. B. Stewart
67United Nations A/CN.9/WG.V/WP.90
(~' General Assembly.,~ Distr.: Limited31 August 2009
Original: English
United Nations Commission onInternational Trade LawWorking Group V (Insolvency Law)Thirt-seventh session
Vienna, 9-13 November 2009
UNCITRAL Legislative Guide on Insolvency Law
Part three: Treatment of enterprise groups in insolvency
Note by the Secretariat
1. This note sets forth the draft commentar and recommendations of part three
of the UNCITRAL Legislative Guide on Insolvency Law. The commentar is arevised version of the text previously included in documents A/CN.9/WG.V/WP.82and Addenda 1-3. The recommendations are based on the recommendations set forthin document A/CN.9/WG.V/WP.85 and Add.l and revised on the basis of the Reportof Working Group V on the work of its thirty-sixth session in May 2009(A/CN .9/671).
2. A/CN.9/WG.V/WP.90 addresses the treatment of enterprise groups in thedomestic context, while NCN.9/WG.V/WP.90/Add.l addresses the internationalcontext. NCN.9/WG.V/WP.90/Add.2 is provided for the information and
consideration of the Working Group. It includes some explanatory notes that areintended to explain revisions made to the draft recommendations" to facilitatediscussion and to raise questions for consideration by the Working Group; it is notintended that the content of A/CN.9/WG.V/WP.90/Add.2 would form part of the text
of part three of the Legislative Guide.
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UNCITRAL Legislative Guide on Insolvency Law
Part three: Treatment of enterprise groups in insolvency
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . .
i. Enterprise groups: general features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Introduction.....................................................B. Nature of enterprise groups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Reasons for conducting business through enterprise groups. . . . . . . . . . . . . .
D. Defining the "enterprise group" - ownership and control. . . . . . . . . . . . . . . .
E. Regulation of enterprise groups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
II. Addressing the insolvency of groups: domestic issues. . . . . . . . . . . . . . . . . . . . . . .
A. Introduction.....................................................B. Application and commencement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Treatment of assets on commencement of insolvency proceedings. . . . . . . .
D. Remedies.......................................................E. Participants...................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F. Reorganization of two or more enterprise group members. . . . . . . . . . . . . . .
Paragraphs Page
1-2 3
3 3
4-42 4
4-8 4
9-18 5
19-28 8
29-33 11
34-42 13
43-185 15
43-46 15
47-78 16
79-129 26
130-172 41
173-178 55
179-185 59
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Introduction
UNCITRAL Legislative Guide on Insolvency Law
Part three: Treatment of enterprise groups in insolvency
1. Part three of the Legislative Guide focuses on the treatment of enterprise
groups in insolvency. Where an approach different to that taken in part two might berequired with respect to a particular issue as it affects an enterprise group or wherethe treatment of enterprise groups in insolvency raises issues additional to thosediscussed in part two, they are addressed in this part. Where the treatment of anissue in the context of an enterprise group is the same as discussed above, it is notrepeated in this part. The substance of part two is therefore applicable to enterprisegroups unless otherwise indicated in this part.
2. Chapter I addresses general features of enterprise groups. Chapter II deals withthe insolvency of group members in a domestic context and proposes a number ofrecommendations to supplement the recommendations of part two, in so far asadditional issues arise by virtue of the group context. Chapter II addresses thecross-border insolvency of enterprise groups, building upon the UNCITRAL ModelLaw on Cross-Border Insolvency, which is relevant to cross-border insolvencyproceedings with respect to an individual group member, but does not address issuespertinent to the insolvency of different group members in different States.
Glossary
3. The following additional terms relate specifically to enterprise groups andshould be read in conjunction with the terms and explanations included in the mainglossary above.
(a) "Enterprise group": two or more enterprises that are interconnected bycontrol or significant ownership;
(b) "Enterprise": any entity, regardless of its legal form, that is engaged ineconomic activities and may be governed by the insolvency law; i
(c) "Control": the capacity to determine, directly or indirectly, the operating
and financial policies of an enterprise;
i Consistent with the approach adopted with respect to individual debtors, the focus of this part isupon the conduct of economic activities by entities that would conform to the types of entitiesdescribed as an "enterprise". It is not intended to include consumers or other entities of aspecialized nature (e.g. banks and insurance companies) that would not be governed byinsolvency law pursuant to recommendations 8 and 9 (see above, footnote 6 torecommendation 9). The special considerations arising from the insolvency of such debtors arenot specifically addressed in the Legislative Guide (see above, par two, chap. I, paras. 1-11).
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(d) "Procedural coordination": coordination of the administration of two ormore insolvency proceedings in respect of enterprise group members. Each of thosemembers, including its assets and liabilities, remains separate and distinct; 2
(e) "Substantive consolidation": the treatment of the assets and liabilities oftwo or more enterprise group members as if they were part of a single insolvencyestate.3
I. Enterprise groups: general features
A. Introduction .
4. Most jurisdictions recognize the legal concept of "corporation", an entitywhich has a legal personality separate from the individuals comprising it, whetheras owners, managers, or employees. As a legal or juristic person, a corporation iscapable of enjoying and being subject to certain legal rights, duties and liabilties,such as the capacity to sue and be sued, to hold and transfer propert, to signcontracts and to pay taxes. The corporation also enjoys the characteristic ofperpetuity, in the sense that its existence continues, independent of its members atany given time and over time, and shareholders can transfer their shares withoutaffecting the entity's corporate existence. Corporations may also have limitedliability, whereby investors wil only be liable for the amount they haveintentionally put at risk in the enterprise, providing certainty and encouraging
investment; without that limitation, investors would put their entire assets at risk forevery business venture they entered into. A corporation depends on a legal processto obtain its legal persona and once formed, wil be subject to the regulatory regimeapplying to entities so formed. That law generally wil determine not only therequirements for formation, but also the consequences of formation, such as the
powers and capacities of the company, the rights and duties of its members and theextent to which members may be liable for the company's debts. The corporate formcan thus be seen as promoting certainty in the ordering of business affairs, as thosedealing with a corporation know that they can rely upon its legal personality and therights, duties and obligations that attach to it.
5. The business of corporations is increasingly conducted, both domestically and
internationally, through "enterprise groups". The term "enterprise group" coversdifferent forms of economic organization based upon the single entity and for aworking definition may be loosely described as two or more corporations that arelinked together by some form of control (whether direct or indirect) or ownership(see below). The size and complexity of enterprise groups may not always bereadily apparent, as the public image of many is that of a unitary organizationoperating under a single corporate identity.
6. Enterprise groups have been in existence for some time, emerging in some
countries, according to commentators, at the end of the i 9th and beginning of the20th centuries through a process of internal expansion, which involved companies
2 The concept of procedural coordination is explained in detail in the commentar, see belowparas. 63-66.
3 For the effects of substantive consolidation and the treatment of security interests, see below,recommendations 224 to 226 and the commentary at paras. 159-162.
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taking control of their own financial, technical or commercial capacities. These
single entity enterprises then expanded externally to take legal or economic controlof other corporations. Initially these other corporations may have been in the samemarket, but eventually the expansion encompassed corporations working in relatedfields and later in fields that were different or unrelated, whether by reference to aproduct or geographical location or both. One of the factors supporting thisexpansion, at least in some jurisdictions, was the legitimatization of ownership ofthe shares of one corporation by another corporation; a phenomenon originallyprohibited in both common law and civil law systems.
7. Throughout this expansion, corporations retained and continue to retain, theirseparate legal personality even though individual corporations are now probably thetypical form of organization only for small private businesses. Enterprise groups areubiquitous in both emerging and developed markets, with a common characteristicof operations across a large number of often-unrelated industries, often with familyownership in combination with varying degrees of participation by outside investors.The largest economic entities in the world include not only States, but also equalnumbers of multinational enterprises. Major multinational groups may beresponsible for significant percentages of Gross National Product worldwide andhave annual growth rates and turnovers that exceed those of many States.
8. Despite the reality of the enterprise group, however, much of the legislation
relating to corporations and particularly to their treatment in insolvency, deals withthe single corporate entity. Despite the absence of legislation, judges in manycountries, faced with issues that may be addressed by reference to a singleenterprise rather than a single corporate entity,4 have developed solutions to achieveresults that better reflect the economic reality of modern business.
B. Nature of enterprise groups
9. Enterprise group structures may be simple or highly complex, involving
numbers of wholly or partly owned subsidiaries, operating subsidiaries, sub-subsidiaries, sub-holding companies, service companies, dormant companies, crossdirectorships, equity ownership and so forth. They may also involve other types ofentity, such as special purpose entities (SPE),5 joint ventures,6 offshore trusts7 andparnerships.
4 Discussed further below, see E, paras. 34-42.5 Special purpose entities (SPE, also known as a "special purpose vehicle" or "bankruptcy-remote
entity") are created to fulfi narrow or temporary objectives, such as the acquisition andfinancing of specific assets, primarily to isolate financial risk or enhance tax effciency. An SPEis typically a subsidiar owned almost entirely by the parent corporation; certain jurisdictionsrequire that another investor own at least 3 per cent. Its asset and liability structure and legalstatus generally makes its obligations secure even if the parent becomes insolvent. Thecorporation establishing the SPE can accomplish its purpose without having to car any of the
associated assets or liabilities on its own balance sheet, thus they are "off-balance sheet." SPEsmay also be used for competitive reasons to ensure intellectual propert, such as for thedevelopment of new technology, is owned by a separate entity that is not affected by pre-existing licence agreements.
6 Ajoint venture is often a contractual arrangement or parnership between two or more parties topursue ajoint business purpose. Such an arangement may sometimes result in the formation of
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10. Enterprise groups may have a hierarchical or vertical structure, withsucceeding layers of parent and controlled companies, which may be subsidiaries orother types of affliated or related companies, operating at different points in a
production or distribution process. They may also have a more horizontal structure,with many sibling group members, often with a high degree of cross-ownership,operating at the same level in that process. The businesses they conduct may be in arelated field or in a diverse range of unrelated fields. It has been suggested thathorizontal groups are more common in some parts of the world, such as Europe,while vertical groups are more common in others, such as the USA and Japan.
11. The research literature on enterprise groups clearly shows that they can bebased on different types of allances such as bank relationships, interlocking boarddirectorates, owner allances, information sharing, joint ventures, and cartels. Theresearch also shows that enterprise group structures vary across corporate
governance systems. In some States, they are organized either vertically orhorizontally and develop across industries. They generally include a bank, a parentor holding company8 (referred to as "parent company") or a trading company, and adiverse group of manufacturing firms. In contrast, in other States such groups aretypically controlled by a single family or a small number of familes and areuniformly vertically organized or have strong ties to the State, but not to particularfamiles. Degrees of diversification also vary considerably, with some groups
involving significant intra-group trading and other not.9
12. The degree of financial and decision-making autonomy in enterprise groups
can vary considerably. In some groups, members may be active trading entities, withprimary responsibilty for their own business goals, activities and finances. In others,strategic and budgetary decisions may be centralized, with group members
one or more legal entities that may involve both parties contributing equity, and sharing in therevenues, expenses, and control of the enterprise. The venture could be for one specific projectonly, or a continuing business relationship. Joint ventures are widely used in an internationalcontext, as some countries require foreign corporations to form joint ventures with a domesticpartner in order to enter a market. This requirement often results in technology and managerialcontrol being transferred to the domestic parner. Fonning ajoint venture might assist inspreading costs and risks; improving access to financial resources; providing economies of scaleand advantages of size; and facilitating access to new technologies and customers or toinnovative managerial practices. It may also serve competitive and strategic goals such asinfluencing structural evolution of an industry; pre-empting competition; creating strongercompetitive units; and facilitating transfer of technology and skils, as well as diversification.
7 An offshore trust is a conventional trust that is formed under the I aws of an offshore jurisdiction.
They are similar in nature and effect to onshore trusts, involving a transfer of assets to a trusteeto manage for the benefit of a person or class of persons. Offshore trusts may be formed for taxpurposes or asset protection. In practice the effectiveness of such trusts may be limited iftheinsolvency law of the home jurisdiction of the person transferring the assets operates to set asidetransfers to the trusts, and transactions entered into to defraud creditors.
8 A holding company or parent company is a company that directly or indirectly owns enoughvoting stock in another finn to control management and operations by influencing or electing itsboard of directors. The term may signify a company that does not produce goods or servicesitself, but whose purpose is to own shares of other companies (or own other companies outright).
9 Some research suggests that groups in Chile, for example, are more divers than groups in SouthKorea, while groups in the Philippines are more vertically integrated than groups in India andfar more involved in financial services than groups in Thailand. See T. Khanna and Y. Yafeh,Business Groups in Emerging Markets: Paragons or Parasites? Journal of Economic Literature,Vol. XLV (June 2007) pp33 1-372.
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operating as divisions of a larger business and exercising little independent
discretion within the cohesive economic unit. A parent company may exercise closecontrol by allocating equity and loan capital to group members through a centralgroup finance operation, deciding their operational and financial policies, settingperformance targets, selecting directors and other key personnel, and continuouslymonitoring their activities. The power of the group may be centralized in theultimate parent company or in a company further down the group chain, with theparent company owning the key group shares, but not having any direct productiveor managerial role. The largest groups might have their own banks and perform theprincipal functions of a capital market. Group financing might involve intra-grouplending between the parent company and subsidiaries, involving loans both fromand to the parent company and the granting of cross-guarantees. 10 Intra-group
lending might be working capital or unpaid short-term debt, such as unpaiddividends or credit in respect of intra-group trading; they mayor may not involvethe payment of interest.
13. In some States, family ties play an important connecting factor in enterprisegroups and it may be the case, for example, that the more important family membersand close associates of family members will sit on the board of the parent companyof a group, with members of that board spread around the boards of group membersso that there is a web of interlinked common directorships, enabling the family tomaintain control over the group. For example, the chart of a large group in Indiashows a complex web of shared directorships between the board of the parentcompany and 45 other group members.ll
14. In some countries, enterprise groups have enjoyed close ties to governmentsand government policies, such as those affecting access to credit and foreigncurrency and competition, which have significantly influenced the development ofgroups. Equally, there are examples where government policies have targeted theoperations of enterprise groups, removing certain types of preferential treatment,such as access to capitaL.
15. The structure of many enterprise groups shows the dimension and potential
complexity of the arangements. They may involve many layers of differentcompanies controlled to a greater or lesser extent by the level or levels above, insome cases involving hundreds if not thousands of different companies. 12
10 In many countries a significant method of enterprise group capital raising is cross-guaranteefinancing, where each company within a group guarantees the performance of the others.Implementing cross-guarantee claims in liquidation has proved diffcult in some jurisdictionsand they have sometimes been set aside. In one jurisdiction, cross-guarantees may operate toreduce the regulatory burden on companies by bestowing accounting and auditing relief oncompanies that are part to the arrangement. The deed of cross-guarantee makes the group of
companies that are party to that deed akin to a single legal entity in many respects and operatesas a form of voluntar contribution or pooling in the event that one or more of the companiespart to the deed goes into liquidation while the cross-guarantee is stil operative. One
advantage of this arrangement is that creditors and potential creditors can focus on theconsolidated position for those entities, rather than on the individual financial statements of thewholly owned subsidiaries that are part to the deed.
11 See Khanna and Yafeh, note 9.12 A 1997 survey in Australia of the Top 500 listed companies showed that 89 per cent of those
companies controlled other companies; the greater the market capitalization of a listed company,
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16. A study based upon the 1979 accounts and reports of a number of largeBritish-based multinationals, for example, had to be abandoned with respect to twoof the largest groups, with 1,200 and 800 subsidiaries respectively, because of theimpossibilty of completing the task. Researchers noted that few people inside thegroup could have had a clear understanding of the precise legal relationshipsbetween all group members and that none of the groups studied appeared to have itsown complete chart.!3 Similarly, the group charts of several Hong Kong propertygroups such as Carrian, which failed over 20 years ago, ran to several pages and areader would have needed a good magnifying glass to identify the subsidiaries. Thegroup chart of the Federal Mogul group, an automotive component supplier, whenblown up to the point where you can read the names of all the subsidiaries, fills awall of a small offce. The group char of CoIlns and Aikman, another automotive
group, is printed in a book, with sub-sub-groups having the complexity of structureof many domestic enterprise groups.
17. The degree of integration of a group might be determined by reference to anumber of factors, which might include the economic organization of the group (e.g.,whether the administrative structure is arranged centrally or maintains theindependence of the various members, whether subsidiaries depend on theenterprise group for financing or loan guarantees, whether personnel matters are
handled centrally, the extent to which the parent makes key decisions on policy,operations and budget and the extent to which the businesses of the group areintegrated vertically or horizontally); how the group manages its marketing (e.g., theimportance of intra-group sales and purchases, the use of common trademarks,logos and advertising programmes and the provision of guarantees for the products);and the public image of the group (e.g., the extent to which the group presents itselfas a single enterprise and the extent to which the activities of the constituentcompanies are described as operations of the group in external reports, such as thosefor shareholders, regulators and investors).
18. The legal structure of a group as a number of separate legal entities is notnecessarily determinative of how the business of the group is managed. While eachgroup member is a separate entity, management may be arranged in divisions alongproduct lines and subsidiaries may have one or many product lines with the resultthat they fall across different divisions. In some cases, management may treatwholly owned subsidiaries as if they were branches of the parent company.
C. Reasons for conducting business through enterprise groups
19. Diverse factors shape the formation, operation and evolution of enterprisegroups, ranging from legal and economic factors to societal, cultural, institutionaland other norms. State leadership, inheritance customs, kinship structures (including
the more companies it was likely to control (this ranged from an average of 72 controlledcompanies for those companies with the largest market capitalization to an average of 9 for thesmallest); 90 per cent of controlled companies were wholly owned; the number of verticalsubsidiary levels in ii enterprise group ranged from 1 to 11, with an overall average of 3 to 4.In other countries the figures are much larger. Cited in Companies and Securities AdvisoryCommittee (CASAC), Corporate Groups Final Report, 2000 (Australia), paragraph 1.2.
13 Hadden, Inside Corporate Groups, 1984 International Journal of Sociology of Law, 12,271-286,p273.
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inter-generational considerations), ethnicity and national ideology, as well as thelevel of development of the legal (e.g., effectiveness of contract enforcement) andinstitutional framework supporting commercial activity may influence enterprisegroups in different environments. Some studies suggest that group structures canmake up for under-developed institutions, with consequent benefits for transactioncosts.
20. The advantages of conducting business through an enterprise group structuremay include reduction of commercial risk and maximization of financial returns, byenabling the group to diversify its activities into various types of businesses, eachoperated by a separate group company. One company may acquire another toexpand and increase market power, at the same time preserving the acquiredcompany and continuing to operate it as a separate entity to utilze its corporatename, goodwil and public image. Expansion may occur to acquire new, technical ormanagement skils. Once formed, groups may continue to exist and proliferatebecause of the administrative costs associated with rationalizing and liquidatingredundant subsidiaries.
21. A group structure may enable a group to attract capital to only part of itsbusiness without forfeiting overall control, by incorporating that part of the businessas a separate subsidiary and allowing outside investors to acquire a minorityshareholding in it. A group structure may enable a group to lower the risk of legalliabilty by confining high liability risks, such as environmental and consumerliability, to particular group members, thus isolating the remaining group assetsfrom this potential liabilty. Better security for debt or project financing may befaciltated by moving specific assets into a separate member incorporated for thatpurpose, thus ensuring that the lender has a first priority over the whole or most ofthe new member's propert. A separate group member may also be formed toundertake a particular project and obtain additional finance by means of chargesover its own assets and undertaking or may be required for the purpose of holding agovernment license or concession. A group structure can simplify the parial sale ofa business as it may be easier, and sometimes more tax effective, to transfer theshares of a group member to the purchaser, rather than sell discrete assets. A groupmay also be formed incidentally when a company acquires another company, whichin tum might be a parent company for various other companies.
22. Meeting prudential or other statutory requirements may be easier where thecompanies subject to those regulatory requirements are separate group members. Inthe case of multinational groups, the domestic law of paricular countries in whichthe group wishes to conduct business may require that local businesses be conductedthrough separate subsidiaries (sometimes subject to minimum local equityrequirements) or impose other requirements or limitations, relating for example toemployment and labour regulation. Arrangements not involving equity have beenused for foreign expansion because of, for example, local obstacles to equityparicipation, the level of regulation imposed upon foreign investment operations
and the relative cost advantages of those types of arangement. Another relevantfactor for multinational groups may be geographical imperatives, such as the need toacquire raw materials or to market products through a subsidiary established in aparticular location. A related consideration of increasing importance that perhapsrelates more to where parts of the groups structure are to be located than to thequestion of whether or not to organize a business through a group structure, is the
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importance of local law on issues such as cost and simplicity of incorporation in thefirst instance, obligations of incorporated entities and treatment of the group ininsolvency. Differences in law across jurisdictions can significantly complicatethese issues.
23. Other key drivers for complicated group structures include fiscalconsiderations and their influence on the flow of money within groups. Theincidence of tax is often cited as the reason for the formation of and subsequentgrowth of enterprise groups and many legal systems have traditionally given weightto the economic unity of related entities. While separate taxation of individualentities might be the underlying principle, it may be qualified to fulfi basicpurposes such as protecting the revenue interests of governments and alleviating thetax burden that would otherwise result from the separate taxation of each groupmember. 14 Measures that take into account the connections between parent andsubsidiary companies include tax exemptions for intra-group dividends; group relief;and measures aimed at combating tax evasion. Tax exemptions may be available, forexample, on the dividends paid by a company to its resident corporate shareholdersand for intra-group dividends where companies are linked by substantial ownership.Tax credits may be allowed for the foreign tax paid on the underlying profits of thesubsidiary and for the foreign tax that is charged directly on a dividend. Group reliefmight be available where related companies can be treated as a single fiscal unit andfie consolidated accounts. The losses of one subsidiary may be offset against theincome of another or profits and losses may be pooled amongst group members.
24. As a result of the importance of fiscal considerations, inter-group pricing
policies and national taxation rates and policies often determine the distribution ofassets and liabilties within enterprise groups. Differential corporate tax rates across
jurisdictions, as well as certain exceptions (such as reduced tax rates for profitsfrom manufacturing activities or financial services income) applicable in somejurisdictions may make those jurisdictions more attractive than others that havehigher tax rates and fewer or no exceptions. Nevertheless, tax authorities may havethe right to revisit transfer-pricing structures aimed at locating profits in low
taxation domiciles.
25. Choices such as between establishing a branch or a subsidiary might also beaffected by fiscal regulation where, for example, repatriation of profits from aforeign subsidiary may be effected tax free by loan repayments to a parent companyor may be tax free provided the parent owns a specified percentage (ranging
from 5-20 per cent) of the foreign company's share capital; interest on fundsborrowed to finance the acquisition of a subsidiary can be offset against their profitsand as already noted, the subsidiaries profits and losses can be offset against eachother in a consolidated tax return. Business activities have also been divided
between two or more corporations to exploit tax allowances, limits imposed on theamounts of tax allowances or progressive rates of taxation. Other reasons mightinclude: taking advantage of differences in accounting methods, taxable years,
depreciation methods, inventory valuation methods and foreign tax credits;segregating activities that if combined in a single taxable entity, might bedisadvantageous in fiscal terms; and taking advantage of favourable treatment for
14 International Investment and Multinational Enterprises - Responsibility of parent companiesand their subsidiaries, OECD, 1979.
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certain activities (e.g., anticipated or potential sales, mergers, liquidations or intra-family gifts or bequests) that is available for some operations, but not for others.
26. Accounting requirements also have a role to play in determining the structureof enterprise groups. In some jurisdictions, certain devices such as "agent only"subsidiaries might be created to manage certain aspects of the business and enablethe parent company to avoid submitting detailed trading accounts for that subsidiary,which is just an agent of the parent company that owns all of the relevant assets.
27. Many of these benefits of conducting business through an enterprise groupmay be ilusory. Protection against devastating losses may fall away as a result ofgroup financing agreements; intra-group trading; cross-guarantees; and letters ofcomfort is given to group auditors and the inclination of major creditors, andparticularly bankers, to ensure that they have the indemnity of the top member inany group.
28. To avoid dollbt, group structures are not required from the accounting point ofview - accountants are just as happy with consolidating branches as groups of
subsidiaries. It seems probable that the banking, commercial and legal sectors oftenfail to appreciate the accounting aspects of enterprise groups. The opportunities formisunderstanding wil increase in the transition to new international financialreporting standards and as many groups change their consolidation approach fromone that has regard for the substance of transactions, to one that requires legal formto prevail over substance. It was the "off-balance" accounting structures that madeEnron, WorldCom and other failures possible and the need for clarity of financialstatements is widely acknowledged.
D. Defining the "enterprise group" - ownership and control
29. Although the existence of enterprise groups and the importance ofrelationships between the group members are increasingly acknowledged, both inlegislation and court decisions, there is no coherent body of rules that directlygoverns those relationships in a comprehensive manner. In jurisdictions where thereis legislation that recognizes enterprise groups, it may not specifically deal with theregulation of such groups, by way of commercial or corporate legislation, but ratherbe contained in legislation on taxation, corporate accounting, competition and
mergers or other issues; legislation addressing the treatment of enterprise groups ininsolvency is rare. Furthermore, an analysis of legislation that does address aspectsof enterprise groups reveals a diversity of approaches to the various issues
associated with groups, not only between jurisdictions, but also on a comparison ofthe different legislation within a single jurisdiction. Thus different tests may applyto what constitutes a group for different purposes, although there may be commonelements, and where those tests employ a particular concept, such as "control",
is A letter of comfort is generally provided by a parent company to persuade another entity to enterinto a transaction with a subsidiary. It may include various types of undertaking, none of whichwould amount to a guarantee, which may include an undertaking to maintain its shareholding orother financial commitment to a subsidiar; using its influence to see that the subsidiar meetsits obligation under a primary contract; or confirming that it is aware of a contract with thesubsidiary, but without any express indication that it wil assume any responsibility for theprimary obligation.
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definitions may be broader or narrower, depending upon the purpose of thelegislation, as noted above.
30. While much legislation avoids specifically defining the term "enterprisegroup", several concepts are common to determining what relationships betweencompanies will be suffcient to constitute them as an enterprise group for certainspecific purposes, such as extending liabilty, accounting purposes, taxation and soon. These concepts are found both in legislation and in numerous court decisions ongroups in various countries and generally include aspects of ownership and controlor influence, both direct and indirect, although in some examples only directownership or control or influence is considered. The choice between the twoconcepts often reflects a balance between the desirability of certainty, which can beachieved by setting a prescribed level of ownership, and flexibilty, which might bebetter achieved by referring to control and acknowledging the diverse economicrealities of enterprise groups.
31. Some examples consider ownership by reference to a formal relationshipbetween the companies, such as what constitutes a parent-subsidiary relationship.This may be determined by reference to a formal standard - the holding, whetherdirectly or indirectly, of a specified percentage of capital or votes. Examples ofthose percentages vary from as little as 5 per cent to more than 80 per cent. Thoselaws specifying lower percentages generally consider additional factors such as theones discussed below as indicators of control. In some examples, the percentagesestablish a rebuttable presumption as to ownership, while higher percentages
establish a conclusive presumption.
32. Other examples of what constitutes an enterprise group adopt a morefunctional approach and focus on aspects of control, or controlling or decisiveinfluence (referred to in this note as control), where "control" is often a definedterm. The key elements of control include actual control or capacity to control,either directly or indirectly, financial and operating policy and decision-making.Where the definition includes capacity to control, it generally envisages a passivepotential for control, rather than focusing upon control that is actively exercised.Control may be obtained by ownership of assets, or through rights or contracts thatgive the controlling party the capacity to control. What is important is not so muchthe strict legal form of the relationship, such as parent-subsidiary, between the
entities, but rather the substance of that relationship.
33. Factors that might indicate the existence of control of one entity by anothercould include: the ability to dominate the composition of the board of directors orgoverning body of the second entity; the ability to appoint or remove all or amajority of the directors or governing members of the second entity; the ability tocontrol the majority of the votes cast at a meeting of the board or governing body ofthe second entity; and the abilty to cast or regulate the casting of, a majority of thevotes that are likely to be cast at a general meeting of the second entity, irrespectiveof whether that capacity arises through shares or options. Information that may berelevant to consideration of these factors might include: the group member'sincorporation documents; details about the member's shareholding; informationrelating to substantive strategic decisions of the member; internal and externalmanagement agreements; details of bank accounts and their administration andauthorized signatories; and information relating to employees.
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E. Regulation of enterprise groups
34. Regulation of enterprise groups is generally based on one of two approaches orin some cases on a combination of the two: the separate entity approach (which isthe traditional approach and by far the most prevalent) and the single enterpriseapproach.
35. The separate entity approach relies on several basic principles, foremost ofwhich is the separate legal personality of each group company. It is also based uponthe limited liabilty of shareholders of each group company and the duties ofdirectors of each separate group entity to that entity.
36. The separate legal personality of a corporation generally means that it has itsown rights and duties, irrespective of who controls it or owns it (Le., whether it iswholly or partly owned by another company) and its participation in the activities ofthe enterprise group. The debts it incurs are its debts and the assets of the groupgenerally cannot be pooled 16 to pay for these debts. Contracts entered into withexternal persons do not automatically involve the parent company or other groupmembers. A parent company cannot take into account the undistributed profits ofother group companies in determining its own profits. Limited liabilty of acorporation means that unlike in a partnership or sole proprietorship, enterprisegroup members have no liabilty for the group's debts and obligations, with theresult that potential losses cannot exceed the amount contributed to the groupmember by purchasing shares.
37. The single enterprise approach, in comparison, relies upon the economic
integration of enterprise group members, treating the group as a single economicunit that operates to further the interests of the group as a whole, or of the dominantcorporate body, rather than of individual members. Borrowing may be conducted ona group basis, with group treasury arrangements being used to offset the credit anddebit balances of each group member; group members may be permitted to operateat a loss, or be undercapitalized, as par of the overall group financial structure andstrategy; assets and liabilities may be moved between group members in variousways; and intra-group loans, guarantees or other financial arrangements may beentered into on essentially preferential terms.
38. While many countries follow the separate entity approach, there are somecountries that recognize exceptions to strict application of that approach and othersthat have introduced, either by legislation or through the courts, a single enterpriseapproach that applies to certain situations.
39. Some of the circumstances in which strict application of the separate entityapproach has been overridden may include: consolidation of enterprise groupaccounts for a company and any controlled entity; related person transactions(where a public company is otherwise prohibited from giving any financial benefit,including intra-group loans, guarantees, indemnities, releases of debt or asset
transfers, to a related company unless that transaction is approved by shareholdersor is otherwise exempt); cross-shareholding (where group members are generallyprohibited from acquiring, or taking a security over, the shares of any controllngmember or issuing or transferring their shares to any controlled member); and
16 See below, paras. 143-172 for a discussion of substantive consolidation.
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insolvent trading (where a parent company which ought to suspect the insolvency ofa subsidiary can be made liable for the debts of that subsidiary incurred when it wasinsolvent).
40. A few countries have established various categories of enterprise groups thatcan operate as a single enterprise, in exchange for enhanced protection of creditorsand minority shareholders. In one,17 enterprise group structures involving publiccompanies are divided into three categories: (a) integrated groups; (b) contractgroups; and (c) de facto groups, to which a set of harmonized single enterprise
principles dealing with corporate governance and liabilty applies:
(a) Integrated groups are based upon a vote, by a specified proportion ofshareholders of the parent company, which in turn owns a specified proportion ofthe shares of the subsidiary, to approve the complete integration of the subsidiary.The parent company wil have unlimited power to direct the subsidiar, in return forthe parent company being jointly and severally liable for the debts and obligationsof the subsidiary;
(b) Contract groups can be formed by a specified proportion of shareholdersof each of two companies entering into a contract that grants one company (theparent) the right to direct the other company, provided the directions are consistentwith the interest of the parent company or the group as a whole. In return for givingthe parent company the right of control, minority shareholders and creditors aregiven enhanced protection; and
(c) De facto groups are those where one company exercises, either directlyor indirectly, a dominant influence over another company. Although not created byany formal arrangement, there must nevertheless be systematic involvement by theparent in the affairs of the controlled company.
41. In one countryl8 where single enterprise principles have been introduced intocorporate legislation, directors of wholly or partly owned subsidiaries may act in theinterests of the parent company rather than their subsidiary company; there areprovisions for streamlined group mergers; and legislation also permits contributionand pooling orders.
42. In another country,19 commercial regulatory laws affecting enterprise groups
increasingly use single enterprise principles to ensure that the policy underlyingspecific commercial legislation cannot be undermined or avoided by the use ofenterprise groups. The courts have assisted in this development, selectively
introducing the single enterprise concept to achieve the underlying policies of thelegislation. The concept has been applied to insolvency law to avoid specifiedintra-group transactions, to support intra-group guarantees and in limited cases, toachieve substantive consolidation. The courts also have the power to alter thepriority of claims in the liquidation of a group entity, either by treating some
intra-group loans to that entity as equity rather than debt, or by subordinating
intra-group loans to that entity to the claims of its external creditors.
17 Germany.18 New Zealand.19 USA.
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II. Addressing the insolvency of groups: domestic issues
Å. Introduction
43. Enterprise groups may be structured in ways that minimize the threat ofinsolvency to one or more group members, by entering into cross-guarantees,indemnities and similar types of arrangements. Where problems do arise, a parent orcontrollng group member may seek to avoid the insolvency of other group membersin order to preserve its reputation and maintain its credit in commercial and
financial spheres by providing additional finance and agreeing to subordinate
intra-group claims to external liabilties.
44. However, if the complexity of an enterprise group's structure is disturbed bythe onset of financial difficulty affecting one or more, or even all of the groupmembers that leads to insolvency, problems arise simply because the group isconstituted by members that are each recognized as having a separate legalpersonality and existence. Since, as noted above, the great majority of domestic
insolvency and corporate laws do not address the insolvency of enterprise groups,even though group issues might be addressed outside the insolvency area in relationto accounting treatment, regulatory issues and taxation, the absence of legislativeauthority to the contrar or judicial discretion to intervene in insolvency means that
each entity has to be separately considered and, if necessary, separately
administered in insolvency. In certain situations, such as where the business activityof group members is closely integrated, that approach may not always achieve thebest result for the individual debtor or for the business of the group as a whole,unless the multiple, parallel proc~edings can be closely coordinated.
45. Much of what already exists in domestic law regarding the insolvency ofenterprise groups concentrates on the circumstances in which it might beappropriate to consolidate insolvency estates. What is lacking is more guidance onhow the insolven,?y of enterprise groups should be addressed more comprehensivelyand, in particular, whether and in what circumstances enterprise groups should betreated differently from a single corporate entity.
46. A second key issue in the treatment of enterprise groups in insolvency is thedegree to which the group is economically and organizationally integrated and howthat level of integration might affect treatment of the group in insolvency and inparicular, the extent to which a highly integrated group should be treated differentlyto a group where individual members retain a high degree of independence. In somecases, where for example the structure of a group is diverse, involving unrelatedbusinesses and assets, the insolvency of one or more group members may not affectother members or the group as a whole and the insolvent members can be
administered separately. In other cases, however, the insolvency of one groupmember may cause financial distress in other members or in the group as a whole,because of the group's integrated structure, with a high degree of interdependenceand linked assets and debts between its different parts. In those circumstances, itmight often be the case that the insolvency of several or many group memberswould lead inevitably to the insolvency of all members (the "domino effect") andthere may be some advantage in judging the imminence of the insolvency byreference to the group situation as a whole or coordinating that consideration withrespect to multiple members.
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B. Application and commencement
47. General considerations with respect to application for and commencement ofinsolvency proceedings are discussed above in part two, chapters I and II. Sincethose chapters apply equally to individual enterprise group members, they should beconsidered in conjunction with the additional issues specific to enterprise groupsdiscussed below.
1. Joint application for commencement
(a) Background
48. As a general rule, insolvency laws respect the separate legal status of eachenterprise group member and a separate application for commencement ofinsolvency proceedings is required to be made for each of those members thatsatisfy the standard for commencement of insolvency proceedings and are coveredby the insolvency law (see recommendation 10). There are some limited exceptionsthat allow a single application to be extended to other group members where, forexample, all interested parties consent to the inclusion of more than one groupmember; the insolvency of one group member has the potential to affect other groupmembers; the parties to the application are closely economically integrated, such asby intermingling of assets or a specified degree of control or ownership; or
consideration of the group as a single entity has special legal relevance, especiallyin the context of reorganization plans.
49. The recommendations of the Legislative Guide concerning application for andcommencement of insolvency proceedings would apply to debtors that areenterprise group members in the same manner as they apply to debtors that areindividual commercial enterprises. Recommendations 15 and 16 establish thestandards for debtor and creditor applications for commencement of insolvencyproceedings and form the basis upon which an application could be made for eachgroup member that satisfied those standards, including imminent insolvency in thecase of an application by a debtor. In the enterprise group context, the insolvency ofa parent or controllng group member may affect the financial stability of asubsidiary or controlled member or the insolvency of a number of such membersmight affect the solvency of others, so that insolvency is imminent more widelyacross the group. That situation is likely to be covered by the terms ofrecommendation 15 if, at the time of the application with respect to the insolventgroup members, it could be said of the other group members that they would beunable to pay their debts as they mature.
(b) Purpose of a joint application50. Permitting those group members that satisfy the commencement standard to
make a joint application for commencement of insolvency proceedings would
facilitate the coordinated consideration of those applications by the court, withoutaffecting the separate identity of the applicants or removing the need for each one toindividually satisfy the applicable commencement standard. It would also alert thecourt to the existence of a group, paricularly if the application were to be
accompanied by information substantiating the existence of the group and therelationship between the debtors and, where proceedings subsequently commenced
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on the basis of that joint application, would have the advantage of establishing acommon commencement date for relevant group members.
51. Such a joint application might include, where permitted under the law and
feasible in the circumstances, a single application covering all group members thatsatisfy the commencement standard or parallel applications made at the same timein respect of each of those members. The latter approach may be appropriate wherethe group members are not located in the same domestic jurisdiction and differentcourts have competence (as discussed below) or where other circumstances of thecase, such as that there is a significant number of proceedings to be coordinated,suggest that a single application would not be practicaL. In both cases, theinsolvency law should facilitate the court undertaking a coordinated considerationof whether the commencement standards with respect to the individual groupmembers are satisfied, taking into account the group context where relevant.
(c) Joint application and procedural coordination distinguished
52. The making of a joint application for commencement of insolvencyproceedings should be distinguished from what is referred to below as proceduralcoordination. The purpose of permitting a joint application is to facilitatecoordination of commencement considerations and potentially reduce costs.Commencement of multiple proceedings on the basis of a joint application shouldalso facilitate coordination of those proceedings; the commencement date, and anyother dates calculated by reference to that date, such as those relating to the suspectperiod, would be' the same for each member. Permitting a joint application is notintended to predetermine how, if the proceedings commence, they will be
administered and, in particular, whether they will be subject to procedural
coordination. Nevertheless, a joint application for commencement might include anapplication for procedural coordination, as noted below, and might facilitate thecourt taking a decision on procedural coordination.
(d) Including a solvent group member in a joint application
53. A question that is often discussed in the group context is whether a solventgroup member can be included in an application for commencement of insolvencyproceedings with respect to other group members and if so, in what circumstances.Where a group member appears to be solvent, but further investigation showsinsolvency to be imminent, inclusion of that member in the application would becovered by recommendation 15 of the Legislative Guide, as noted above.
54. Where the question is not one of imminent insolvency and the group memberis clearly solvent, different approaches may be taken. Where a group is closelyintegrated, an insolvency law may permit an application for commencement toinclude group members that do not satisfy the commencement standard, on the basisthat it is desirable in the interests of the group as a whole that those members beincluded in the proceedings. Factors relevant to determining whether the necessarydegree of integration exists might include: the relationship between the groupmembers that is variously described, but involves, for example, a significant degreeof interdependence or control; intermingling of assets; unity of identity, reliance onmanagement and financial support or other similar factors that need not necessarilyarise from the legal relationship (such as parent-subsidiary) between the group
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members. A further situation in which including a solvent group member in a jointapplication might be appropriate is where the existence of a "group" is fictitious.
55. Such an approach may faciltate development of an insolvency solution for thewhole group, avoiding piecemeal commencement of proceedings over time, if andwhen additional group members became affected by the insolvency proceedingsinitiated against the original1y insolvent members. It could also faciltate thepreparation of a comprehensive reorganization plan, addressing the assets of bothsolvent and insolvent group members.
56. One of the problems with including a solvent group member, however, is thatthe insolvency law will generally only cover those entities properly regarded assatisfying the standard for commencement of insolvency proceedings. A solventgroup member may, however, be voluntarily included in a reorganization plan,where a commercial decision is taken by that member that it should participate inthe plan (see below, para. 184).
57. A joint application for commencement might also be permitted where all
interested group members consent to the inclusion of one or more other members,whether they are insolvent or not, or all paries in interest, including creditors, soconsent. An insolvency law might also consider whether a group member notinvolved at the time of commencement of insolvency proceedings against othergroup members might later be joined in those proceedings if it is subsequentlyaffected by those proceedings or it is determined that its joinder would be in theinterests of the group as a whole.
(e) Persons permitted to make a joint application
58. Consistent with the approach of recommendation 14 of the Legislative Guide,an insolvency law may permit a joint application to be made by two or moreenterprise group members that satisfy the commencement standard of the insolvencylaw. It might also be made by any creditor with respect to the group members ofwhich it is a creditor. Permitting a creditor to make an application with respect togroup members of which it is not a creditor would be inconsistent with thecommencement standard of recommendation 14.
(t) Competent courts
59. A joint application for commencement with respect to two or more enterprisegroup members may raise issues of jurisdiction, even in the domestic context, ifthose group members are located in different places with different courts potentiallybeing competent to consider the application. This may occur, for example, in respectof a group operating nationally in States where jurisdiction for insolvency matterslies with courts in different places or applications for commencement may be madein different courts. Some laws may allow a joint application for commencement tobe handled by a single court. Although that approach is desirable, it wil ultimatelybe a question of whether domestic law permits joint applications involving differentdebtors (albeit members of the same group) in different jurisdictions or courts to betreated in such a way. Various criteria might be relevant to determining the
appropriate court for handling such an application. It might, for example, be thecourt with competence to administer insolvency proceedings with respect to theparent or controllng member of a group, where that member is included in the
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application. Other criteria, such as the size of indebtedness of the various groupmembers or the centre of control of the group might also be chosen to establish theprevailng competence of one court in the domestic setting. Creditors of differentgroup members might also be located in different places, raising issues ofrepresentation and the location in which creditor committees would meet or beconstituted.
60. The fees payable and other associated procedural issues arising out of a jointapplication for commencement may need to be addressed.
61. Although the issue of which court is competent to consider a joint applicationfor commencement where the subject group members are located in differentdomestic jurisdictions might be addressed by law other than the insolvency law, it isdesirable that the approach of recommendation 13 of the Legislative Guide befollowed. This would require the insolvency law to clearly indicate or include areference to the relevant law that establishes the court with jurisdiction over such anapplication. Adoption of that approach should make it clear to all' relevant partieswhere and how such an application can be pursued.
(g) Notice of application
62. The recommendations of the Legislative Guide with respect to notification ofan application for commencement of insolvency proceedings would apply to a jointapplication. A joint application by a creditor should be notified to the group
members that are the subject of the application in accordance withrecommendation 19 (a). Where group members make a joint application, noticewould not be required until proceedings commenced on the basis of that application,in accordance with recommendation 22.
Recommendations 199-201
Purpose of legislative provisions
The purpose of provisions on joint application 20 for commencement ofinsolvency proceedings with respect to two or more enterprise group members is:
(a) To faciltate coordinated consideration of an application forcommencement of insolvency proceedings with respect to those enterprise groupmembers;
(b) To enable the court to obtain information concerning the enterprise groupthat would faciltate determination of whether commencement of insolvency
proceedings with respect to those group members should be ordered;
(c) To facilitate effciency and reduce the costs associated withcommencement of those insolvency proceedings; and
(d) To provide a mechanism21 for the court to assess whether proceduralcoordination of those insolvency proceedings would be appropriate.
20 A joint application for commencement does not afect the legal identity of each group memberincluded in the application; each member remains separate and distinct.
21 Ajoint application is not a pre-requisite for procedural coordination, but may facilitate thecourt's consideration of whether an order for procedural coordination should be made.
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Contents of legislative provisions
Joint applicationfor commencement o/insolvency proceedings
199. The insolvency law may specify that ajoint application for commencement ofinsolvency proceedings may be made with respect to two or more enterprise groupmembers, each of which satisfies the applicable commencement standard.22
Persons permitted to apply
200. The insolvency law should specify that ajoint application may be made by:
(a) Two or more enterprise group members, each of which satisfies theapplicable commencement standard in recommendation 15; or
(b) A creditor, provided it is a creditor of each group member that is to beincluded in the joint application.
Competent courts
201. For the purposes of recommendation 13, the words "commencement andconduct of insolvency proceedings, including matters arising in the course of thoseproceedings" include a joint application for commencement of insolvency
proceedings with respect to two or more enterprise group members.23
2. Procedural coordination
(a) Purpose of procedural coordination
63. Procedural coordination is intended to promote procedural convenience and
cost-effciency and may faciltate comprehensive information being obtained on the
business operations of the group members subject to the insolvency proceedings;assist the valuation of assets and the identification of creditors and others withlegally recognized interests; and avoid duplication of effort. Procedural coordinationrefers to what may in practice be varing degrees of coordination with respect to theadministration of multiple insolvency proceedings commenced with respect to twoor more enterprise group members involving, possibly, one or more courts.Although administered in a coordinated manner, the assets and liabilities of eachgroup member involved in the procedural coordination remain separate and distinct,thus preserving the integrity of the individual enterprises of the group and thesubstantive rights of claimants. Accordingly, the effect of procedural coordination islimited to administrative aspects of the proceedings and does not touch uponsubstantive issues. The scope of an order for procedural coordination wouldgeneral1y be determined by the court in each case.
64. Multiple proceedings may be streamlined in various ways through an order forprocedural coordination, facilitating sharing of information to obtain a more
22 See above, recommendation 15, which addresses debtor applications and recommendation 16,
which addresses creditor applications for commencement.23 Recommendation 13 provides: The insolvency law should clearly indicate (or include a
reference to the relevant law that establishes) the court that has jurisdiction over thecommencement and conduct of insolvency proceedings, including matters arising in the courseof those proceedings. The criteria that might be relevant to determining the competent court arediscussed in the commentar, see above, para. 59.
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comprehensive picture of the situation of the various debtors; combining of hearingsand meetings, including joint meetings of creditors; preparation of a single list ofcreditors and other parties in interest for the provision of notice and coordination ofthe provision of notice; establishment of joint deadlines; agreement on it jointclaims procedure and coordinated sale of assets; coordination of avoidance
proceedings; and the holding of single creditor meetings or coordination amongcreditor committees. Streamlining may also be faciltated by the appointment of asingle or the same insolvency representative to administer the insolvencyproceedings or by ensuring coordination between insolvency representatives where
two or more are appointed (see below, paras. 173-177). It may also involvecooperation between two or more courts or, when permitted by domestic law,administration of the multiple proceedings concerning group members in a singlecourt.
65. Where two or more courts are involved, cooperation between them mightinclude, for example, coordinating the holding of hearings, including joint hearings,and sharing and disclosure of information. As noted below with respect to cross-border cooperation (see part three, chap. II, paras. ...), joint or coordinated hearingsmay significantly promote the efficiency of parallel insolvency proceedings
involving members of an enterprise group by bringing relevant stakeholderstogether at the same time to discuss and resolve outstanding issues or potentialconflcts, thus avoiding protracted negotiations and resulting time delays. Such
hearings would generally involve two or more courts holding hearings at the sametime with provision for simultaneous communication so that parties can at least hearand preferably see the proceedings in each court. These hearings may be relativelymore convenient to organize in a domestic setting, as they would not generallyinvolve the challenges posed by different languages, time zones, laws, proceduresand judicial traditions that may occur in the cross-border context. However, as in theinternational context, the conduct of such hearings might require the use of commonprocedures and agreement, for example, as to how filing of documents and
submission of information is to be handled between different courts.
66. Various factors might be relevant to considering whether procedural
coordination is appropriate in a paricular case. These may relate, for example, toinformation substantiating the existence of the group and identifying the linkagesbetween group members, including the position in the group of each membercovered by the application, particularly where one of them was the controllnggroup member or parent. Although the provision of such detail might be onerous incases where creditors are permitted to apply for procedural coordination, the
essence of the application is that the debtors are group members and the court wouldgenerally need to be satisfied as to that relationship when determining whetherproceedings should commence and procedural coordination be ordered.
(b) Creditor participation
67. With respect to creditor participation, the interests of creditors of the differentgroup members have the potential to diverge and it is unlikely that those interestscould be represented in a single committee. It may be, however, that in cases ofprocedural coordination involving many group members, establishing a separatecommittee for the creditors of each member might prove to be extremely costly andinefficient for administration of the proceedings. For that reason, the courts in some
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States have the discretion not to establish a creditor committee for each separateentity in appropriate circumstances. Accordingly, the general principle may be thatit is desirable that the insolvency law permit a single creditor committee to beestablished in suitable cases.
(c) Timing of application
68. Since the benefits to be derived from procedural coordination may be apparent
at the time an application for commencement is made or may arise after proceedingshave commenced, it is desirable that an insolvency law adopt a flexible approach tothe timing of an application for procedural coordination. An application might
therefore be made at the same time as an application for commencement ofproceedings or at any subsequent time. However, since the goal of procedural
coordination is to coordinate the administration of multiple proceedings, the
feasibility of making an order at a late stage of the proceedings would be limited, inpractice, by the usefulness of so doing. In other words, there may be little advantagein seeking to coordinate proceedings that are almost completed. The same approachmight apply to adding group members to an existing order for proceduralcoordination where those additional members became insolvent at a later time.
69. An insolvency law might adopt the approach of stipulating a time limit forapplying for procedural coordination to provide a degree of certainty. However, as isgenerally the case with any consideration of the need for a time limit, theadvantages of establishing such a limit must be weighed against the potentialdisadvantages of inflexibilty and the need to ensure that the time limit is properlyobserved.
(d) Persons permitted to apply
70. It is desirable that procedural coordination be as widely available as possible
and that the court be given the discretion to consider whether coordination of thevarious proceedings would advantage their administration. The court may considerwhether to order procedural coordination on its own initiative, particularly toaddress situations it is determined that procedurally coordinating the proceedingswould be in the best interests of the enterprise group and faciltate administration,but no application for procedural coordination is forthcoming from a party
authorized to do so. The court might also order procedural coordination in response
to an application from authorized paries, such as any group member subject toinsolvency proceedings, the insolvency representative of a member, who wouldgenerally possess the information most relevant for making such an application, or acreditor.
71. In the case of creditors, the eligibility limitation that applies with respect to anapplication for commencement of insolvency proceedings should not necessarilyapply. Where the application for procedural coordination is made at the time of theapplication for commencement, the issue of commencement might be treatedseparately from that of procedural coordination. Similarly, once proceedings havecommenced, there is no reason to limit the abilty to apply for procedural
coordination to those creditors who are creditors of the members to be coordinated -the decision to order procedural coordination should not be conditioned upon thestatus of the creditor applying.
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(e) Competent courts
72. Procedural coordination may also raise the issues of jurisdiction noted abovewith respect to joint applications for commencement (see above, paras. 59-61),where different domestic courts have competence over the various group memberssubject to insolvency proceedings. In jurisdictions where those issues arise, theywould generally be determined by reference to domestic procedural law. In someStates, different proceedings may be consolidated or transferred to a single court,for example, the court with competence to administer insolvency proceedings with
respect to the parent of a group. A range of other criteria, such as priority of fiing,size of indebtedness or centre of control, might also be chosen to establish theprevailing competence of one court in the domestic setting. A key element ofconsolidating or transferring proceedings to a single court would be establishing
communication between the courts involved prior to that transfer. Creditors ofdifferent group members might also be located in different places, raising issues ofrepresentation and the location in which creditor committees would meet or beconstituted.
73. Although these issues might be addressed by law other than the insolvency law,it is desirable, as noted above with respect to joint applications (see para. 61), thatthe approach of recommendation 13 be followed. That would require the insolvencylaw to clearly indicate or include a reference to the relevant law that establishes thecourt with jurisdiction over an application for procedural coordination.
(t) Notice with respect to procedural coordination
74. An application for procedural coordination may be subject to the samerequirements for giving of notice as an application for commencement of
proceedings under the Legislative Guide (see recommendations 19, 22-24). Whenmade at the same time as the application for commencement of proceedings, only anapplication for procedural coordination by creditors would require notice to begiven to the relevant debtors, consistent with recommendation 19.
75. An application made at that time by group members should not require
creditors to be notified, consistent with recommendations 23-24, but relevant
information, such as the content or implications of the order, could be included withthe notice of commencement of proceedings.
76. When an application for procedural coordination is made subsequent tocommencement of proceedings, it may be appropriate to provide notice to creditors,notwithstanding that procedural coordination does not affect the substantive rightsof creditors. The provision of notice may be particularly important where the lawmakes provision, as noted above, for cases commenced in different jurisdictions tobe transferred to; or administered by, a single court and that transfer may affectprocedural aspects of the proceedings of interest to creditors, such as the location ofmeetings of a creditor committee or the place for submission of claims.
77. Provision of notice to all creditors may be satisfied with collective notification,such as by notice in a paricular legal publication, when domestic legislation so
permits and when appropriate, for instance, in the case of a large number ofcreditors with very small claims. In addition to the information required by the
recommendations above addressing provision of notice on commencement ofproceedings (recommendation 25), notice of an order for procedural coordination
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might include the terms of the order and information relevant to, for example,
coordination of hearings and meetings, and arrangements to be made with respect tolending.
(g) Modifying or terminating an order for procedural coordination
78. Given that the purpose of procedural coordination is to promote administrativeconvenience and cost-effciency, an insolvency law may include provisions relatingto modification or reversal of an order to accommodate changed circumstances.
That approach might be appropriate when, for example, a coordinated
reorganization is not successful and the individual members should be liquidatedseparately. Reversal of an order, although rarely required, should be possible as theinitial order is not intended to affect substantive rights. As a safeguard, the
insolvency law could provide that reversal or modification would be possible,provided it was without prejudice to actions already taken or rights affected by theinitial order.
Recommendations 202-210
Purpose of legislative provisions
The purpose of provisions on procedural coordination of insolvencyproceedings with respect to two or more enterprise group members is:
(a) To facilitate coordination of the administration of those insolvencyproceedings, while respecting the separate legal identity of each group member; and
(b) To promote cost-effciency and a better return to creditors.
Contents of legislative provisions
Procedural coordination of two or more insolvency proceedings
202. The insolvency law should specify that the administration of insolvencyproceedings with respect to two or more enterprise group members may becoordinated for procedural purposes.
203. The insolvency law should specify that, at the request of a person permitted tomake an application under recommendation 206 or on its own initiative, the court24may order procedural coordination.
204. Procedural coordination may involve, for example, joint provision of notice;coordination of procedures for submission and verification of claims; appointmentof a single or the same insolvency representative; coordination of avoidance
proceedings; cooperation between the courts, including coordination of hearings;and cooperation between insolvency representatives, including information sharingand coordination of negotiations. The scope and extent of the procedural
coordination (in each case) should be specified by the court.
24 Coordination might involve different courts competent with respect to different group membersor a single court that is competent with respect to a number of different insolvency proceedingsconcerning members of the same group. Accordingly, an order for procedural coordination mayrequire action by more than one court.
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Application for procedural coordination
- Timing of application
205. The insolvency law should specify that an application for proceduralcoordination may be made at the time of an application for commencement ofinsolvency proceedings or at any subsequent time.25
Persons permitted to apply
206. The insolvency law should specify that an application for proceduralcoordination may be made by:
(a) An enterprise group member that is subject to an application forcommencement of insolvency proceedings or subject to insolvency proceedings;
(b) The insolvency representative of an enterprise group member; or
(c) A creditor 26 of an enterprise group member that is subject to anapplication for commencement of insolvency proceedings or subject to insolvencyproceedings.
Coordinating consideration of an application
207. The insolvency law should specify that the court27 may take appropriate stepsto coordinate with any other competent court consideration of an application forprocedural coordination of insolvency proceedings concerning two or moreenterprise group members. Those steps might involve, for example, coordinatedproceedings; joint hearings; sharing and disclosure of information.
Modifcation or termination of an order for procedural coordination
208. The insolvency law should specify that an order for procedural coordinationmay be modified or terminated, provided that any actions or decisions already takenpursuant to the order should not be affected by the modification or termination.Where more than one court is involved in ordering procedural coordination, thosecourts may take appropriate steps to coordinate modification or termination of theprocedural coordination.
Competent courts
209. For the purposes of recommendation 13, the words "commencement and
conduct of insolvency proceedings, including matters arising in the course of thoseproceedings" include applications and orders for procedural coordination of
insolvency proceedings with respect to two or more enterprise group members.28
25 The impracticability of ordering procedural coordination at an advanced stage of the insolvencyproceedings is discussed in the commentar; see above, paras.68-69.
26 To be eligible to make an application for procedural coordination, a creditor does not have to bea creditor of all the group members in respect of which it is seeking procedural coordination.
27 See note 23 above.28 The criteria that might be relevant to determining the competent court are discussed in the
commentary, see above, para. 59 and note 23.
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Notice of procedural coordination
210. The insolvency law should establish requirements for giving notice withrespect to applications and orders for procedural coordination and modification ortermination of procedural coordination, including the scope and extent of the order;to whom notice should be given; the part responsible for giving notice; and thecontent of the notice.
C. Treatment of assets on commencement of insolvency proceedings
79. The manner in which the commencement of insolvency proceedings affects thedebtor and its assets is discussed in detail above (see par two, chap. II). In general,those effects would apply equally to commencement of insolvency proceedings
against two or more enterprise group members. Some of the effects that might differin the group context are discussed below, with respect to protection and preservationof the insolvency estate; post-commencement finance; avoidance; subordination;and remedies, including substantive consolidation orders.
1. Protection and preservation of the insolvency estate
(a) Application of the stay to a solvent group member80. As noted above (see part two, chap. II, para. 26), many insolvency lawsinclude a mechanism to protect the value of the insolvency estate that not onlyprevents creditors from commencing actions to enforce their rights through legalremedies during some or all of the period of insolvency proceedings, but alsosuspends actions already under way against the debtor. The recommendations
relating to the application of that mechanism, referred to as a "stay", would applygenerally in the case of insolvency proceedings against two or more enterprise
group members (see recommendations 39-51).
81. One issue that might arise in the context of the insolvency of enterprise groups,but not in the case of individual debtors, is the extension of the stay to an enterprise
group member that is not subject to the insolvency proceedings (where the
insolvency law permits a group member that is not insolvent to be included in theproceedings, this issue wil not arise). The issue may be of particular relevance to
enterprise groups because of the interrelatedness of the business of the group. Forexample, when finance is arranged on a group basis by way of cross-guarantees orcross-collateralization, the finance provided to one member might affect theliabilties of another, or actions affecting the assets of group members not subject toinsolvency proceedings may also affect the assets and liabilties or the ability tocontinue their ordinary course of business of group members with respect to whichapplications for commencement have been made or insolvency proceedings havecommenced.
82. Extension of the stay to include the solvent member might be sought in a
number of situations, for example, to protect an intra-group guarantee that reliesupon the assets of the solvent group member providing the guarantee; to restrain alender from seeking to enforce an agreement against a solvent group member, wherethat enforcement might affect the liabilty of another member subject to anapplication for insolvency proceedings; and to restrain enforcement of a security
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interest against assets of a solvent member that are central to the business of thegroup, including the business of group members subject to an application forinsolvency proceedings. Extension of the stay in these cases has the potential toaffect the business of the solvent member and the interests of its creditors,depending upon the nature of the solvent member and its function within the groupstructure. The day-to-day activities of a trading group member, for example, may bemore adversely affected than those of a group member established to hold certainassets or obligations.
83. In some States, ordering insolvency-related relief with respect to a solventgroup member (not included in insolvency proceedings) might not be possible as itwould conflict, for example, with the protection of property rights or raises issues ofconstitutional rights. Nevertheless, it might be possible to achieve the same effect ifa court could order measures of protection in conjunction with the commencementof insolvency proceedings with respect to other enterprise group members in certaincases, such as where there is an intra-group guarantee. The measures may beavailable at the courts' discretion, subject to such conditions as the court determinesappropriate.
84. These measures might be covered by recommendation 48, which provides for
the court to grant relief in addition to any relief that might be applicable
automatically on commencement of insolvency proceedings (as addressed inrecommendation 46). As the footnote to recommendation 48 points out, thatadditional relief would depend upon the types of measures available in a particularjurisdiction and the measures that might be appropriate in a particular insolvencyproceeding.
85. Measures might also be available on a provisional basis. Recommendation 39addresses provisional measures, specifying the types of relief that might be
available "at the request of the debtor, creditors or third parties, where relief isneeded to protect and preserve the value of the assets of the debtor or the interestsof creditors, between the time an application to commence insolvency proceedingsis made and commencement ofthe proceedings".
86. Protection for the interests of the creditors, both secured and unsecured, of thesolvent group member, might also be found in the relevant recommendations above.Recommendation 51, for example, specifically addresses the issue of protection ofsecured creditors and grounds for relief from the stay applicable on commencementand might be extended to secured creditors of the solvent group member. Othergrounds for relief from the stay might relate to the financial situation of the solventmember and the continuing effect of the stay on its day-to-day operations and,potentialIy, its solvency.
87. Where a secured creditor is a member of the same enterprise group as thedebtor or debtors, a different approach to the question of protection might be
required, especialIy where the insolvency law permits substantive consolidation orsubordination of related person claims (see below, paras.121- I 26).
(b) Post-application finance
88. The discussion on post-commencement finance in part two, chapter IIrecognizes that the continued operation of the debtor's business after thecommencement of insolvency proceedings is critical to reorganization and, to a
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lesser extent, liquidation, where the business is to be sold as a going concern. Tomaintain its business activities, the debtor must have access to funds to enable it tocontinue to pay for crucial supplies of goods and services, including labour costs,insurance, rent, maintenance of contracts and other operating expenses, as well ascosts associated with maintaining the value of assets.
89. The same need for finance also occurs in the period between the time anapplication for commencement of insolvency proceedings is made andcommencement of those proceedings (referred to as post-application finance). Whenan enterprise group member becomes insolvent and makes an application forcommencement of insolvency proceedings, that application often triggers an eventof default under existing loan agreements, entitling the lender to discontinue
advancing funds under those agreements. Where an insolvency law does not providefor automatic commencement of insolvency proceedings upon application, it canoften take a period of several months between the making of an application and thecommencement of the proceedings, during which time, the courts must make anindependent evaluation as to whether the debtors subject to the application meet thestatutory criteria to commence proceedings. However, if the group member is tocontinue as a going concern while this determination is being made, it must be ableto continue to conduct its business, pay its employees, pay its suppliers and
generally continue its day-to-day activities. The availabilty or lack of financingduring this interim period can determine or significantly influence whether
reorganization wil ultimately be a viable option or whether liquidation wil be
required.
90. As noted above (part two, chap. II, para. 96), in the absence of enabling orclarifying treatment in the insolvency law, the provision of finance in this periodbefore commencement of the insolvency proceedings may raise diffcult questionsrelating to the application of avoidance powers and the liability of both the lenderand the debtor. Some insolvency laws provide, for example, that where a lenderadvances funds to an insolvent debtor in the period before commencement ofproceedings, the lender may be responsible for any increase in the liabilities of othercreditors or the advance may be subject to avoidance in any ensuing insolvencyproceedings as a preferential transaction.
91. The existence of a provision under the insolvency law enabling finance to beobtained for the period of time between the making of an application and thecommencement of the proceedings would provide the necessary authorization andgive any existing or new lender the assurance and incentive necessary to provide
additional financing to cover that period.
92. Recommendation 39 permits the court to order provisional measures topreserve the assets of the debtor prior to the commencement of insolvency
proceedings, where those measures are needed to protect those assets and theinterests of creditors. Since those measures could include authorizing post-application, the provision of that finance should therefore be regarded as beingwithin the purview of recommendation 39.
2. Use and disposal of assets
93. It is noted above (see part two, chap. II, para. 74) that, although as a generalprinciple it is desirable that an insolvency law not interfere unduly with the
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ownership rights of third paries or the interests of secured creditors, the conduct ofinsolvency proceedings will often require assets of the insolvency estate, and assetsin the possession of the debtor being used in the debtor's business, to continue to beused or disposed of (including by way of encumbrance) in order to enable the goalof the particular proceedings to be realized.
94. Where insolvency proceedings concern two or more enterprise group members,issues may arise with regard to the use of assets belonging to a group member notsubject to insolvency proceedings to support ongoing operations of those memberssubject to such proceedings, pending resolution of the proceedings. Where thoseassets are in the possession of one of the group members subject to insolvencyproceedings, recommendation 54, which addresses the use of third-party ownedassets in the possession of the debtor, may be suffcient.
95. Where those assets are not in the possession of any of the group memberssubject to insolvency proceedings, recommendation 54 generally wil not apply.There may be circumstances, however, where the solvent group member inpossession of those assets is included in the insolvency proceedings or the
provisions of a group reorganization plan should cover the assets (see below,
para. i 84, for a discussion of the inclusion of a solvent group member in areorganization plan). Where the solvent group member is not included in theproceedings, the question wil be whether those assets can be used to support group
members subject to insolvency proceedings and if so, the conditions to which thatuse would be subject. The use of those assets might raise questions of avoidance,paricularly where the supporting member subsequently became insolvent, and alsoraises concerns for creditors of that member.
3. Post-commencement finance
(a) The need for post-commencement finance
96. The discussion on post-commencement finance above in part two, chapter II(see paras. 94-95) recognizes that the continued operation of the debtor's business
after the commencement of insolvency proceedings is critical to reorganization and,to a lesser extent, liquidation where the business is to be sold as a going concern. Tomaintain its business activities, the debtor must have access to funds to enable it tocontinue to pay for crucial supplies of goods and services, including labour costs,insurance, rent, maintenance of contracts and other operating expenses, as well ascosts associated with maintaining the value of assets. It is also noted, however, thatmany jurisdictions restrict the provision of new money in insolvency or do notspecifically address the issue of new finance or the priority for its repayment ininsolvency. Of those laws that do address post-commencement finance, very few, ifany, specifically address the issue in the context of enterprise groups.
97. Post-commencement finance may be even more important in the group contextthan it is in the context of individual insolvency proceedings. If there are no
ongoing funds there is very little prospect of reorganizing an insolvent enterprisegroup or selling all or parts of it as a going concern. The economic impact of thatfailure is likely to be much greater, especially in large groups, than it would be inthe case of an individual debtor. The reasons for promoting the availabilty of
post-commencement finance in the group context are therefore similar to the case ofthe individual debtor, although a number of issues different to those relating to the
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individual debtor are likely to arise. These issues may include: balancing theinterests of individual enterprise group members with what is required for thereorganization of the group as a whole; provision of post-commencement finance bysolvent group members, especially in cases where issues of control might arise(such as where that solvent member is controlled by the insolvent parent of thegroup); treatment of transactions that are essentially between related parties (seeglossary, para. Uj)); provision of finance by other group members subject toinsolvency proceedings; the possibilty of conflct of interest between the needs ofthe different debtors with respect to ongoing finance where a single insolvency
representative is appointed to several group members; and the desirability ofmaintaining, in insolvency proceedings, the financing structure that the group hadbefore the onset of insolvency, especially where that structure involved pledging allof the assets of the group for finance that was channelled through a centralized
group entity with treasury functions.
98. Recommendations 63-68 aim to promote the availabilty of finance forcontinued operation or survival of the debtor's business and ensure appropriate
protection for the providers of post-commencement finance, as well as for otherparties whose rights may be affected by the provision of post-commencement
finance. In the enterprise group context, these recommendations would apply topost-commencement finance provided by both lenders external to the group andsolvent members of the group.
(b) Sources of post-commencement finance in a group context
99. As noted above in part two, chapter II (see para. 99), post-commencementfinance is likely to come from a limited number of sources. In the enterprise groupcontext, that might include sources both external and internal to the group, whereinternal sources might include both solvent group members and group membersalready subject to insolvency proceedings. While some of the incentives forproviding post-commencement finance might be the same for internal and externallenders, internal lenders may have the added inducement of their own survivalwhere they are to be part of a reorganization.
(i) Provision of post-commencement finance by a solvent group member
100. As noted above, one of the questions with respect to post-commencement
finance in the enterprise group context is whether the assets of a solvent group
member can be used, such as by provision of a security interest or guarantee, toobtain financing for an insolvent member from an external source or to fund theinsolvent member directly and, if so, the implications for the recommendations
concerning priority and security. A solvent group member might have an interest inthe financial stabilty of the parent, other group members or the group as a whole inorder to ensure its own financial stabilty and the continuation of its business,particularly where it is closely integrated with or reliant upon insolvent members forongoing business activity. Different types of solvent entities, such as specialpurpose entities with few liabilties and valuable assets, might be involved indifferent ways in the insolvency of other group members, such as granting aguarantee or security interest to insolvent group members to help obtain newfinance.
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