The Model Law in Canada

On 30^th May 2022 it will have been 25 years since the Model Law on Cross-Border Insolvency (Model Law) was adopted by the United Nations Commission on International Trade Law with the intention of facilitating cross-border insolvencies more effectively and efficiently. Since then, the Model Law has been adopted in only 50 jurisdictions. 

Fortunately, Canada is one such jurisdiction, the Model Law having been adopted in 2009. Commonly referred to as “Part IV” (as a result of the provisions comprising “Part IV” of the Companies’ Creditors Arrangement Act (CCAA)), the new Model Law provisions replaced what was previously Section 18.6 of the CCAA. Although Section 18.6 had long been used for purposes of foreign recognition, the enactment of Part IV has further facilitated and streamlined the restructuring of several multinational businesses and has become an important and useful tool when considering the restructuring of an international corporate group.

While closely based on the Model Law, Part IV features a number of distinguishing factors as well as accepted (and expected) practices that made Part IV uniquely Canadian. Some of the highlights are set out below.

• Treatment of corporate groups: Courts have found that the COMI of a Canadian subsidiary lies elsewhere (despite a Canadian registered office), particularly when the Canadian subsidiary is predominantly reliant on its foreign parent for back office, managerial or other functions. 
• High bar for contravention of “public policy”: Under Part IV, the court has broad jurisdiction to grant any order it considers necessary for protecting the debtor’s property or the interests of a creditor or creditors, provided such order does not contravene “public policy.” Although the limits of this provision are far from tested, Canadian courts have been willing to recognize foreign orders granting relief that may have otherwise contravened the primary parts of the CCAA – this includes, notably, the recognition of roll-up DIPs (in certain circumstances).
• Impact on Canadian stakeholders: On par with goals of comity and facilitating international restructuring is the court’s concern with understanding any undue prejudice to Canadian stakeholders. There is scant caselaw on this issue, but it is routinely a central concern of the court when faced with applications and motions under Part IV. This has particularly been the case where, for instance, the Canadian assets were not previously fully encumbered or where the Canadian business may otherwise have enterprise value on a stand-alone basis. This issue could also arise in instances where laws relating to the priority of certain claims were not recognized in the treatment of claims under a plan.
• Cross-border communication and cooperation: Canada and the US have a long history of cooperation and extension of comity both formally and informally – although court-to-court protocols on communication have been formally adopted in some cases, the courts will often encourage communication from and to the other presiding court even absent a formal protocol. In other instances, the court has adopted protocols on more substantive matters, such as the jurisdiction and applicable law for resolving cross-border claims.
• Appointment of information officer: Although not enshrined in Part IV, it has become generally expected that the debtor will put forward an independent “information officer” to act as an officer of the court in a Part IV proceeding. Where it is proposed that there be no information officer in a proceeding, the applicant must justify the absence of the proposed appointment. The information officer is generally a licensed insolvency trustee who might otherwise serve as the court-appointed “monitor” in a plenary CCAA proceeding. The courts rely heavily on the information officer’s analysis, particularly as it relates to financial and other cash flow matters as well as any disproportionate prejudice to be suffered by Canadian stakeholders by relief being sought.

We are extremely fortunate in Canada to have sophisticated commercial courts that hear matters relating to corporate restructurings. The provisions of Part IV have helped further codify the court’s broad jurisdiction to exercise comity and grant extensive and creative relief if available where the circumstances warrant. While principles of comity and legislative provisions regarding foreign proceedings existed well prior to the Model Law’s adoption in Canada, there is no doubt that adopting these provisions has assisted in further facilitating international restructuring and provided a degree of predictability and certainty for foreign debtors, creditors and other interested parties. 

Additional resources:

• “A Divine Comity: A Canadian Perspective on the Balance Between International Cooperation and the Preservation of National Autonomy,” www.iiiglobal.org
• “Operating Part IV Proceedings: How to Advise A Company in Chapter 11,” I.I.C. Art. Vol. 5-6?