This article has been contributed to the blog by Steven Golick and Sachin Kanabar.  Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP and Sachin Kanabar is an associate in the group.

In the recent decision of Re Massachusetts Elephant & Castle Group, Inc., Justice Morawetz of the Ontario Superior Court of Justice (the “Court”) provided further guidance on the factors used to determine a debtor’s centre of its main interests (“COMI”) under Part IV of the Companies’ Creditors Arrangement Act (“Part IV”).  In this case, Massachusetts Elephant & Castle Group, Inc. (“MECG”) was the lead debtor of a group of companies (the “E&C Group”) that commenced a proceeding under Chapter 11 of the United States Bankruptcy Code (“Chapter 11 Proceeding”).

Three members of the E&C Group, Repechage Investments Limited, Elephant & Castle Group Inc. and Elephant & Castle Canada Inc. (collectively, the “Canadian Debtors”) were incorporated in Canada.  Two of the Canadian Debtors had their registered offices in Toronto and one of the Canadian Debtors had its registered office in Halifax.  The corporate head offices of the E&C Group, including the Canadian Debtors, was located in Boston, Massachusetts.  The purpose of the Chapter 11 Proceeding was to sell the E&C Group’s business as a going concern on the most favourable terms possible under the circumstances.

MECG, as the proposed foreign representative, applied to the Court under Part IV for, among other things, recognition of the Chapter 11 Proceeding as a foreign main proceeding and a stay of proceedings in Canada with respect to the E&C Group, its property and its directors and officers.  Under Part IV, if the Court is satisfied that a foreign representative’s application relates to a foreign proceeding that deals with creditors’ collective interests generally under any law relating to bankruptcy of insolvency in which the debtor company’s affairs are subject to supervision by a foreign court for the purpose of reorganization then the Court must grant an order recognizing the foreign proceeding in Canada.

The Court must then consider whether the proceeding is a foreign main proceeding or a foreign non-main proceeding.  Under Part IV a foreign main proceeding is defined as a foreign proceeding in a jurisdiction where the debtor company has its COMI.  The COMI is presumed, in the absence of proof to the contrary, to be the debtor’s registered office.  If the foreign proceeding is determined to be a foreign main proceeding then the court is required, subject to any terms and conditions it considers appropriate, to order a stay of proceedings with respect to the debtor and to prohibit the debtor from selling its assets outside of the ordinary course of business.

The Court determined that MECG had satisfied the requirements for recognition of the Chapter 11 Proceeding as a foreign proceeding under Part IV and that MECG was the foreign representative.  The Court then considered whether the Chapter 11 Proceeding was a foreign main proceeding.  In this case, given that the Canadian Debtors’ registered offices were located in Canada, the E&C Group’s COMI was presumed to be in Canada.  Therefore, the issue was whether there was sufficient evidence to rebut this presumption.

MECG submitted that the E&C Group’s corporate head office and all members of its management were located in Boston.  The E&C Group functioned as an integrated North American business with all decisions with respect to the E&C Group, including the Canadian Debtors, being centralized at such head office.  Further, virtually all human resources, accounting and finance, information technology and other administrative functions associated with the E&C Group were located in Boston.  In addition, one of the Canadian Debtors was also the parent company of a group of restaurants that only operated in the United States.  As a result, MECG argued, the E&C Group’s COMI was located in the United States as it was managed centrally from Boston.

The Court however did note some factors in favour of finding that the COMI was in Canada: (i) nearly one-half of the operating locations were in Canada; (ii) approximately 43% of employees worked in Canada; and (iii) a Canadian entity, GE Canada Equipment Financing G.P. (“GE Canada“), was a substantial lender to MECG.

The Court noted a list of factors that had been relied on in prior case law to determine a debtor’s COMI:

(a) the location where corporate decisions are made;

(b) the location of employee administrations, including human resource functions;

(c) the location of the debtor’s marketing and communication functions;

(d) whether the enterprise is managed on a consolidated basis;

(e) the extent of integration of an enterprise’s international operations;

(f) the centre of an enterprise’s corporate, banking, strategic and management functions;

(g) the existence of shared management within entities and in an organization;

(h) the location where cash management and accounting functions are overseen;

(i) the location where pricing decisions and new business development initiatives are created; and

(j) the seat of an enterprise’s treasury management functions, including management of accounts receivable and accounts payable.

It was determined by the Court that these factors merely provide guidance on how a debtor’s COMI is to be interpreted.  In some cases certain factors may be more important than others but no factor is determinative of COMI.  The Court also suggested that some or all of the factors may be considered depending on the facts of the case.  However, the following factors will usually be significant in determining COMI:

(a) the location of the debtor’s headquarters or head office functions or nerve centre;

(b) the location of the debtor’s management; and

(c) the location which significant creditors recognize as being the centre of the company’s operations.

The Court stated that other factors may be relevant in certain cases but they should generally be considered of secondary importance and only to the extent that they relate to the above three significant factors.
In the present case, E&C Group’s head office functions or nerve centre, as well as its management, were in Boston.  In addition, GE Canada, a significant Canadian creditor, did not oppose the relief sought.  Based on these facts, the Court concluded that each member of the E&C Group, including the Canadian Debtors, had their COMI in the United States.
As Part IV is relatively new legislation the case law in respect thereof is still developing.  This case represents a further refinement of the interpretation of a debtor’s COMI in Canada.  The location of a debtor’s headquarters or nerve center and the debtor’s significant creditors’ recognition of that location will have a significant impact on how a court determines the debtor’s COMI.  It will be interesting to see how the case law with respect to a debtor’s COMI continues to develop.

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