This article has been contributed to the blog by Sandra Abitan, Michael De Lellis and Sachin Kanabar.  Sandra Abitan is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, Michael De Lellis is a senior associate in the group and Sachin Kanabar is an associate in the group.
In 1997, the United Nations Commission on International Trade Law released the Model Law on Cross-Border Insolvency (the “Model Law”) in an effort to harmonize different insolvency regimes and promote the fair and efficient administration of international insolvencies.  Since then, the Model Law has been adopted in one form or another by various countries.  The Companies’ Creditors Arrangement Act  (“CCAA”) was amended in September 2009 to add a new Part IV that contains detailed provisions relating to international insolvencies based primarily on the Model Law.
Part IV of the CCAA allows for a coordinated approach to international insolvencies by entitling Canadian courts to recognize orders made by foreign courts.  Once the Canadian court recognizes a foreign proceeding, it must then decide whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding.  This will depend on where the debtor has its centre of main interest (“COMI”).  COMI is not defined in the CCAA, but the CCAA grants the court the right to presume that a debtor’s COMI is located where the debtor keeps its registered office, unless there is evidence that the debtor’s COMI is located elsewhere.  If the debtor’s COMI is in the foreign jurisdiction, the Canadian court will declare that the foreign proceeding is a foreign main proceeding.
The determination of the COMI for members of a corporate group was central to the decision of the Superior Court of Quebec (the “Quebec Court”) in Re Gyro-Trac (USA) Inc.  This is the first Canadian case that required the determination of a COMI under Part IV of the CCAA. 
Gyro-Trac inc. and Gyro Trac Côte Ouest inc., both incorporated under the laws of Quebec, and Gyro-Trac (USA) Inc., a corporation operating in South Carolina, (collectively the “Gyro-Trac Group”) filed a Chapter 11 proceeding in the United States.  The Gyro-Trac Group sold specialized vehicles for use in the forest industry.  The United States District Court for the State of South Carolina (the “US Bankruptcy Court”) appointed each of the members of the Gyro-Trac Group as foreign representatives.  The Gyro-Trac Group then brought an application before the Quebec Court to seek protection under Part IV of the CCAA. The Part IV application was opposed by the major secured creditor of the Gyro-Trac Group, a Canadian bank (the “Bank”), which had previously commenced bankruptcy applications under the Bankruptcy and Insolvency Act (“BIA”) against the two Quebec corporations prior to the Chapter 11 filing.
One of the Bank’s arguments was that the COMI for the two Quebec corporations was in Quebec and that the Chapter 11 proceeding in respect of those corporations should at best be recognized only as a foreign non-main proceeding.  The Gyro-Trac Group submitted that the presumption that the COMI for the two Quebec corporations is in Quebec was rebutted by the evidence and that their COMI was in South Carolina.  If the Chapter 11 proceeding was found to be a foreign main proceeding, the Quebec Court could stay the bankruptcy application under the BIA.  If, on the other hand, the Chapter 11 proceeding was found to be a foreign non-main proceeding, the bankruptcy applications under the BIA could proceed, thereby effectively terminating the Chapter 11 proceeding vis-à-vis the two Quebec corporations.   
In determining whether to rebut the presumption that the debtor’s COMI is the location of the debtor’s registered office, the Quebec Court considered the location of effective commercial activity to be the primary factor.  This was partly based on the reasoning that such an interpretation would likely result in the COMI being the jurisdiction in which the majority of the debtors’ creditors are located. 
The Court then gave effect to the following evidentiary factors to conclude that the COMI for the two Quebec corporations resided in the United States:

  • Gyro-Trac inc., the Quebec parent company, did not carry on any commercial activity in Canada other than holding the shares of its Quebec subsidiary and its U.S. subsidiary;
  • the activities of the Quebec parent were directed on a regular basis from South Carolina;
  • the Quebec subsidiary did not carry on any commercial activity in any jurisdiction;
  • all commercial activity was exercised exclusively by the U.S. subsidiary;
  • nearly all of the secured assets held by the Bank were located in South Carolina;
  • all other secured creditors were U.S.-based;
  • the only employees of the Gyro-Trac Group were employed in South Carolina; and
  • the sole directors of the Quebec corporations and the principal shareholder of the Quebec parent resided in South Carolina.

The Bank sought leave to appeal the decision to the Quebec Court of Appeal.  It argued in part that the trial judge erred because he applied the COMI factors to all of the Gyro-Trac Group as a group enterprise instead of reviewing the factors for each separate company.  The Court of Appeal disagreed with this view and concluded that the trial judge properly considered the factors as they applied to each of the Quebec corporations.  Absent any manifest error, the Quebec Court of Appeal did not need to reconsider the evidence brought before the trial judge to support the COMI determination.  Leave was denied.
Caution should be exercised where the COMI determination is being made in respect of a parent holding corporation.  In the Gyro-Trac Proceeding, the Quebec Court may have placed too much emphasis on the fact that the Quebec parent was not exercising any commercial activity in Canada except to the extent that it held the shares of its affiliates.  By focusing on “commercial activities” of the corporate group as being exercised solely in South Carolina, the Quebec Court may have marginalized the activities of the Quebec holding corporation.  The activities of the foreign subsidiaries should not have a direct impact on the determination of the activities of their parent.  Holding shares in subsidiaries is the primary commercial activity of a holding corporation.  On the particular facts of the case, one can explain the decision in part on the fact that the director of the parent corporation resided in South Carolina and that its principal shareholder also resided in South Carolina.  One can also reasonably argue that the exercise of control by the parent over its subsidiaries was a real commercial activity effected solely in the United States.

The views and opinions expressed herein are exclusively the personal views of the guest contributors only, unless otherwise attributed.  Information and opinions expressed herein do not necessarily represent the views of Weil, its attorneys, or its clients. Please see the complete Disclaimer for additional terms and conditions of use of this blog.