A distinction must be drawn between procedural consolidation and substantive consolidation of restructuring proceedings. In procedural consolidation, the court directs that restructuring proceedings against two or more related persons be consolidated in a single proceeding. This is merely an administrative convenience that reduces the time and expense involved in maintaining separate proceedings. Procedural consolidation does not alter the substantive rights of claimants against their respective debtors.
Substantive consolidation involves a pooling of assets and a pooling of claims. Instead of recognizing the separate assets and separate liabilities of each business entity, the assets and the claims are treated as if they were all held by or against a single entity. As with substantive consolidation of bankruptcy proceedings, an order for substantial consolidation may prejudice creditors who have claims against an entity with a higher assets-to-liabilities ratio and benefit creditors who have claims against a related entity with a lower assets-to-liabilities ratio.15
Canadian courts have demonstrated a willingness to consider United States case law that sets out the conditions that need to exist in order to justify an order for substantive consolidation.16The leading decision from the United States on substantive consolidation is In re Owens Corning.17The court held that the general expectation of the laws and the markets is that entity separateness is to be maintained. Substantive consolidation is appropriate only when the conduct of the debtor has made it inappropriate to recognize the separateness of the entities, and only when more precise remedies have been considered and rejected. In order to succeed, the party asking for substantive consolidation must show that (1), before the commencement of restructuring proceedings, the entities had disregarded separateness so significantly that their creditors relied on the breakdown of entity borders and treated them as one...