Corporate Groups and Crossborder Insolvencies: A Canada-United States Perspective

CORPORATE GROUPS AND CROSSBORDER INSOLVENCIES: A CANADA - UNITED STATES PERSPECTIVE* I. INTRODUCTION World trade and international investments have expanded rapidly over the past twenty-five years.1 Not surprisingly, there has been a corresponding increase in the number of crossborder insolvencies involving multinational enterprises, large and small,2 which has fueled the drive for greater harmonization among the many different national rules governing the treatment of crossborder insolvencies. Canada and the United States are very active participants on both sides of this phenomenon. The two countries are each other's largest trading partners, with over eighty percent of Canada's external trade being with the United States.3 Similarly, there has been a steady increase in the number of crossborder insolvencies that have come before the courts of both countries in which Canadian and U.S. bankruptcy4 judges have been called upon to recognize each other's proceedings and to cooperate closely with a view to maximizing returns for creditors in the liquidation of assets or to help bring about the reorganization of an ailing enterprises.5 The literature describing these developments, both North American and overseas, is very substantial, but there is one aspect that does not appear to have received the attention it deserves.6 These are the problems particular to the reorganization or liquidation of insolvent corporate groups. Large corporations are typically organized in groups.7 The group may have a few affiliates or a thousand or more.8 Given the close business bonds between Canada and the U.S., it is highly predictable that a U.S-centered group will have affiliates in Canada, and vice versa. For a variety of reasons, the failure of a major member of a group will often jeopardize the financial survival of the whole group. Consequently, it is very common in Canada and the U.S. for a corporate group to make a joint insolvency filing encompassing all or most of the members of the group, with a view to reorganizing the affairs of the whole enterprise or to bring about a going concern sale if that course of action should be decided upon.9 The consolidation may be procedural (procedural consolidation) or, much less frequently, substantive in character (substantive consolidations). The evidence indicates that seventy per cent or more of major corporate restructurings in Canada and the U.S. are in some form of consolidated basis.10 This then raises the question, in the case of crossborder insolvencies, of how well the Canadian and U.S. bankruptcy rules and principles dovetail with one another to bring about successful joint proceedings in both countries. There is another side to the coin. The insolvency proceedings may be limited to one member of the group. Nevertheless, creditors of the insolvent company may argue that the parent company was so deeply implicated in the affairs of the failing affiliate that it should be held jointly responsible for the liabilities of the affiliate. Yet again, even if there is no attempt to hold the parent company directly liable, the trustee may argue that a claim the parent company may have against the affiliate should be subordinated to the claims of other creditors because the parent company abused its dominant position. These are familiar issues in domestic insolvency law.11 The question for consideration is how well they play out in a crossborder context where the parent company is U.S. based and the subsidiary is located in Canada, and vice versa with respect to a Canadian parent company and a U.S. based subsidiary. Having said this, I must also add quickly that most of the Canada-U.S. crossborder cases I am familiar with have involved problems of the first type, those arising from consolidated filings, and not from attempts to hold a parent company liable for the activities of its affiliates.12 II. Two PRELIMINARY POINTS A. …

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