Introduction
The Ontario Court of Appeal recently affirmed the decision of the Ontario Superior Court of Justice in Re Nortel Networks Corporation that the common law interest stops rule applies in proceedings under the Companies' Creditors Arrangement Act. The court also clarified that parties retain the right to provide for the consensual payment of post-filing interest in a Companies' Creditors Arrangement Act plan of reorganisation.
The interest stops rule requires that creditors' claims stop accruing interest from the date of the Companies' Creditors Arrangement Act filing. Accordingly, the appellant bondholders in Nortel were not entitled to claim interest accruing post-filing.
This recent decision is another chapter in the ongoing saga of the Nortel multi-jurisdictional insolvency proceedings, which commenced in January 2009.
The appeal was brought by an ad hoc group of bondholders representing a substantial number of unsecured crossover bonds, payable by both US and Canadian Nortel entities as either principal debtors or guarantors. The Companies' Creditors Arrangement Act does not expressly prohibit asserting a claim for post-filing interest. The crossover bondholders thus argued that pursuant to the terms of the indentures under which their bonds were issued – which provided for the continuing accrual of interest until payment – they were entitled to claim post-filing interest.
The crossover bondholders filed claims for principal and pre-filing interest totalling US$4.092 billion against the applicable Canadian and US Nortel debtors. They also claimed an entitlement to post-filing interest amounting to approximately US$1.6 billion, as of December 13 2013. These amounts represented a substantial portion of the total proceeds available for distribution to all of Nortel's creditors (approximately $7.3 billion, generated from the worldwide sale of its businesses). A successful claim for post-filing interest by the crossover bondholders would reduce the amount of proceeds available for distribution to Nortel's other creditors, notably pensioners and former employees, which have no contractual right to post-filing interest.
Before the release of the lower court's decision in Nortel, it was unclear whether unsecured creditors could claim for post-filing interest in proceedings under the Companies' Creditors Arrangement Act. In contrast, the Bankruptcy and Insolvency Act does not allow unsecured creditors to claim for post-filing interest unless a surplus remains after payment of all creditors. Should the interest stops rule apply in Bankruptcy and Insolvency Act proceedings and not in Companies' Creditors Arrangement Act proceedings, the two statutes governing Canada's insolvency regimes would provide for different recoveries to creditors with a contractual right to post-filing interest.
The court in Nortel found that the interest stops rule applies in Companies' Creditors Arrangement Act proceedings. However, the court expressly clarified that its ruling does not prevent a Companies' Creditors Arrangement Act plan of reorganisation from providing for the payment of post-filing interest – which is common practice.
In support of its analysis for the application of the interest stops rule in Companies' Creditors Arrangement Act proceedings, the court noted that this rule is a necessary corollary of the pari passu principle. This governing principle of insolvency law in Canada (and many other legal jurisdictions) provides that the assets of an insolvent debtor must be distributed rateably among the debtor's unsecured creditors, subject to the claims of prior-ranking creditors. Without the interest stops rule, the court held, the fairness and orderly distribution sought through the pari passu principle cannot be achieved.
The court cited various additional reasons for imposing the interest stops rule in Companies' Creditors Arrangement Act proceedings, including:
- harmonising the Companies' Creditors Arrangement Act with the Bankruptcy and Insolvency Act;
- ensuring that creditors without a contractual right to post-filing interest would not be incentivised to prefer liquidation proceedings over Companies' Creditors Arrangement Act reorganisation;
- preserving the status quo, post-filing; and
- maintaining the principle of fairness.
Previous decisions had permitted claims for interest post-filing in Companies' Creditors Arrangement Act proceedings; however, the Ontario Court of Appeal in Nortel limited those decisions to their specific facts and noted that they should be read in light of the Supreme Court of Canada's more recent decisions, which emphasise the need to harmonise the statutory schemes under the Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act.
For these reasons, the court dismissed the appeal.
Notably, the court considered only the bondholders' contractual entitlement to post-filing interest. Pursuant to the Supreme Court of Canada decision in Re Canada 3000 (discussed by the court in Nortel), post-filing interest may be available where the entitlement to such interest is provided for by statute.
For further information on this topic please contact Sara-Ann Van Allen at Dentons Canada LLP by telephone (+1 416 863 4511) or email ([email protected]). The Dentons website can be accessed at www.dentons.com.
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