Filing in Your “Home” Country Doesn’t Mean You Will Get Instant R...

A recent foreign recognition of a bankruptcy proceeding case out of Nova Scotia, Canada, has brought to light the situation where a Canadian company moves to the U.S., seeks protection under chapter 11 of the U.S. Bankruptcy Code, and then seeks to impose that stay on creditors from its former home. Not surprisingly, it didn’t get very far with the Canadian court. And despite the rather unique facts and allegations of misconduct, the case sends the message that Canadian courts may not recognize foreign main proceedings simply because a plenary proceeding has been commenced in a foreign court and the technical requirements for recognition in Canada may have been met.

Wolfridge Lodge Ltd. started its corporate life as Wolfridge Lodge Limited under the Companies Act of Nova Scotia. Its head office was in Nova Scotia, it conducted business in Nova Scotia, and it represented to its creditors (the majority of whom were in Nova Scotia) that it was a Nova Scotia-based company. Wolfridge got into financial difficulty and became the subject of foreclosure and sale proceedings — proceedings that resulted in sale orders being made. Wolfridge fought and lost and tried to get the appeals court to stay the sale, which it lost as well. It also tried to stop one of the proceedings by attempting to seek protection under the Farm Debt Mediation Act and also failed, as the property in question was not a “farm.”

In the midst of these court proceedings, and unbeknownst to creditors, Wolfridge reorganized itself into a Delaware company, moved its registered head office to a Delaware address, and registered itself as a foreign corporation in Nova Scotia. It then filed for protection under chapter 11 of the U.S. Bankruptcy Code and brought an application in Nova Scotia for recognition of the chapter 11 proceeding as a “foreign main” proceeding under s. 270 of the Bankruptcy and Insolvency Act on the basis that Wolfridge was a Delaware company. Two key creditors opposed the application.

The main reason for the application for recognition in Canada was that, if successful, Wolfridge would secure an automatic stay of proceedings in the foreclosure and sale proceedings in Canada, something it could no longer obtain in Canada with a bankruptcy protection filing under the BIA. The court reviewed s.270 of the BIA and the recent case law relating to the test for recognizing a foreign main proceeding under the BIA, including the most important factor in this proceeding: the centre of main interest (COMI) of Wolfridge, the debtor. Wolfridge argued that its COMI was Delaware, while the opposing creditors argued that its COMI was Nova Scotia, which, if the latter was the case, would disqualify Wolfridge from securing recognition of a foreign main proceeding in Canada and the stay of proceedings it was seeking that is automatically granted.

Canada’s process for recognition of foreign bankruptcy proceedings is similar to those found in chapter 15 of the U.S. Bankruptcy Code, being based on UNCITRAL’s Model Law on Cross Border Insolvencies. S. 268 of the BIA provides that in the absence of proof to the contrary, the registered head office of a corporate debtor is deemed to be the debtor’s COMI. Canadian courts, as a result, have entered into analyses that start with the registered head office and then consider other factors to determine the true COMI of a debtor. The court reviewed authoritative texts and outlined the following factors to determine Wolfridge’s COMI:

  1. the location of management;
  2. the location of the primary assets and operations;
  3. the location of the majority of the creditors; and
  4. the location that is readily ascertainable by creditors.

Based on the evidence presented, the court found the debtor’s COMI to be Nova Scotia: The majority of the creditors were in Nova Scotia, the majority of the property was in Nova Scotia and, until what was the effective eve of the filing, the debtor operated out of and represented that it was operating in and out of Nova Scotia.

Of course, the backdrop to the case was the concern that the debtor was trying to do something indirectly, with the help of chapter 11 of the U.S. Bankruptcy Code and the comity principles behind the foreign proceeding recognition provisions of the BIA, that it could not do in Canada directly: i.e., stop its Canadian creditors. Regardless, the case stands for the principle that the courts in Canada will undertake the appropriate analysis to determine COMI and, where appropriate, deny an application for recognition.