Nortel Networks Corp. et al., Re, 2015 ONCA 681

• Judge: Simmons, Gillese and Rouleau, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: April 29, 2015
• Jurisdiction: Ontario
• Citations: 2015 ONCA 681;(2015), 340 O.A.C. 234 (CA)

Nortel Networks Corp., Re (2015), 340 O.A.C. 234 (CA)

MLB headnote and full text

Temp. Cite: [2015] O.A.C. TBEd. OC.013

In The Matter Of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

And In The Matter Of a Plan of Compromise or Arrangement of Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Global Corporation, Nortel Networks International Corporation and Nortel Networks Technology Corporation

(C59703; 2015 ONCA 681)

Indexed As: Nortel Networks Corp. et al., Re

Ontario Court of Appeal

Simmons, Gillese and Rouleau, JJ.A.

October 13, 2015.

Summary:

Beginning in 1996, certain Nortel Networks entities (Nortel) issued or guaranteed unsecured bonds (the crossover bonds). The relevant indentures provided for the continuing accrual of interest until payment, at contractually specified interest rates, as well as other post-filing payment obligations, such as make-whole provisions and trustee fees. In 2009, Nortel filed for and was granted protection under the Companies' Creditors Arrangement Act (CCAA). Holders of the crossover bonds filed claims for principal and pre-filing interest in an amount totalling more than $4 billion USD. They also claimed that they were entitled to post-filing interest and related claims under the terms of the crossover bonds which amounted to approximately $1.6 billion USD as of the end of 2013. The total of these two amounts represented a significant portion of the proceeds generated from a worldwide sale of Nortel's business lines and assets.

The Ontario Superior Court, in a decision with neutral citation 2014 ONSC 4777, held that the bondholders were not legally entitled to claim or receive any amounts under the relevant indentures above and beyond the outstanding principal debt and pre-petition interest. In reaching that conclusion, the court accepted that the common law "interest stops rule", which was a fundamental tenet of insolvency law, applied in the CCAA context. The bondholders appealed.

The Ontario Court of Appeal dismissed the appeal.

Creditors and Debtors - Topic 8581.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Application of concepts of fairness and equity - [See first Creditors and Debtors - Topic 8587.3 ].

Creditors and Debtors - Topic 8582

Debtors' relief legislation - Companies' creditors arrangement legislation - Purpose of - [See first Creditors and Debtors - Topic 8587.3 ].

Creditors and Debtors - Topic 8587.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Claims - Post filing date interest - At issue in this appeal was whether the common law "interest stops rule" (the rule), which was a fundamental tenet of insolvency law, applied in the context of proceedings under the Companies' Creditors Arrangement Act (CCAA) - The Ontario Court of Appeal held that it did - The same principles that underpinned the conclusion that the rule was necessary in bankruptcy and winding-up proceedings, namely, the fair treatment of creditors and the orderly administration of an insolvent debtor's estate, applied with equal force to CCAA proceedings - First, the CCAA was part of an integrated insolvency regime which also included the Bankruptcy and Insolvency Act (BIA) - The CCAA did not address entitlement to claim post-filing interest, let alone oust the common law rule with clear wording - Second, if the rule did not apply to CCAA proceedings, creditors with no claim to post-filing interest would have an incentive to proceed under the BIA or winding-up legislation, where the rule operated to prevent creditors who had a contractual right to interest from improving their proportionate claim against the debtor at the expense of other creditors - Third, if post-filing interest was available to one set of creditors while others were prevented from asserting their rights to sue the debtor and obtaining a judgment that bore interest, the status quo would not be preserved while attempts were made to finding common ground amongst stakeholders for a reorganization that was fair to all - Fourth, the key objective of the CCAA, facilitating the restructuring of corporations through flexibility and creativity, might be undermined if the rule did not apply, because an asymmetrical entitlement to interest would be created - Fifth, insolvency proceedings were intended to be fair processes for liquidating or restructuring insolvent corporations, and the rule supported the application of that principle - See paragraphs 30 to 49.

Creditors and Debtors - Topic 8587.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Claims - Post filing date interest - Beginning in 1996, certain Nortel Networks entities (Nortel) issued or guaranteed unsecured bonds (the crossover bonds) - The relevant indentures provided for the continuing accrual of interest until payment, at contractually specified interest rates, as well as other post-filing payment obligations, such as make-whole provisions and trustee fees - In 2009, Nortel filed for and was granted protection under the Companies' Creditors Arrangement Act (CCAA) - Holders of the crossover bonds filed claims for principal and pre-filing interest - They also claimed that they were entitled to post-filing interest and related claims under the terms of the crossover bonds - The bondholders appealed the decision of a CCAA judge, arguing that he erred in holding that they were not legally entitled to claim or receive any amounts under the relevant indentures above and beyond the outstanding principal debt and pre-petition interest - The Ontario Court of Appeal dismissed the appeal - The CCAA judge confirmed that the common law "interest stops rule" applied in CCAA proceedings - If a plan of compromise or arrangement was concluded, the CCAA judge's decision should not be read as limiting any right to recover post-filing interest that creditors might have as amongst themselves or from non-parties - Nor did it dictate what any creditor might seek in bargaining for a fair plan of compromise or arrangement - The CCAA's judge's use of the words "or receive" did not mean that the bondholders were prevented from seeking and obtaining such a result in a negotiated plan - See paragraphs 92 to 94.

Cases Noticed:

Canada 3000 Inc. (Bankrupt), Re, [2006] 1 S.C.R. 865; 349 N.R. 1; 212 O.A.C. 338; 2006 SCC 24, consd. [para. 6].

Stelco Inc. et al., Re (2007), 226 O.A.C. 72; 35 C.B.R.(5th) 174; 2007 ONCA 483, consd. [para. 6].

Nortel Networks Corp. et al., Re (2015), 23 C.B.R.(6th) 249; 2015 ONSC 2987, refd to. [para. 12].

Century Services Inc. v. Canada (Attorney General) - see Leroy (Ted) Trucking Ltd. et al., Re.

Leroy (Ted) Trucking Ltd. et al., Re, [2010] 3 S.C.R. 379; 409 N.R. 201; 296 B.C.A.C. 1; 503 W.A.C. 1; 2010 SCC 60, refd to. [para. 15].

Sun Indalex Finance, LLC v. United Steelworkers - see Indalex Ltd. et al., Re.

Indalex Ltd. et al., Re, [2013] 1 S.C.R. 271; 439 N.R. 235; 301 O.A.C. 1; 2013 SCC 6, refd to. [para. 15].

Canada (Attorney General) v. Confederation Life Insurance Co., [2001] O.T.C. 486 (Sup. Ct.), refd to. [para. 23].

In re Humber Ironworks and Shipbuilding Co. (1869), L.R. 4 Ch. App. 643, refd to. [para. 25].

Canada 3000 Inc. (Bankrupt), Re, [2002] O.T.C. 310; 33 C.B.R.(4th) 184 (Sup. Ct.), refd to. [para. 55].

Canada 3000 Inc. (Bankrupt), Re (2004), 183 O.A.C. 201; 69 O.R.(3d) 1 (C.A.), refd to. [para. 56].

R. v. Henry (D.B.) et al., [2005] 3 S.C.R. 609; 342 N.R. 259; 376 A.R. 1; 360 W.A.C. 1; 219 B.C.A.C. 1; 361 W.A.C. 1; 2005 SCC 76, refd to. [para. 60].

Stelco Inc. et al., Re, [2006] O.T.C. 748; 24 C.B.R.(5th) 59 (Sup. Ct.), refd to. [para. 71].

Authors and Works Noticed:

Mokal, Rizwaan J., Priority as Pathology: The Pari Passu Myth (2001), 60:3 Cambridge L.J. 581, pp. 581, 582 [para. 23].

Wood, Roderick J., Bankruptcy & Insolvency Law (2009), p. 1 [para. 23, footnote 2].

Counsel:

Richard B. Swan, S. Richard Orzy and Gavin H. Finlayson, for the appellant, Ad Hoc Group of Bondholders;

Andrew Kent and Brett Harrison, for the respondent, The Bank, of New York Mellon;

Edmond Lamek, for the respondent, Law Debenture Trust Company of New York;

Benjamin Zarnett and Graham D. Smith, for the monitor and the respondent, Canadian Debtors;

Kenneth D. Kraft and John J. Salmas, for the respondent, Wilmington Trust, National Association;

Kenneth T. Rosenberg and Ari N. Kaplan, for the respondent, Canadian Creditors' Committee;

Tracy Wynne, for the Joint Administrators (EMEA);

Scott A. Bomhof and Adam M. Slavens, for Nortel Networks Inc./U.S. Debtors.

This appeal was heard on April 29, 2015, before Simmons, Gillese and Rouleau, JJ.A., of the Ontario Court of Appeal. Rouleau, J.A., delivered the following judgment for the court on October 13, 2015.