A CONVERSATION AMONG INSOLVENCY PROFESSIONALS: THE IMPACT OF INSOLVENCY REMEDIES ON INTERNATIONAL BUSINESS AND TECHNOLOGY APPENDIX I

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1 A CONVERSATION AMONG INSOLVENCY PROFESSIONALS: THE IMPACT OF INSOLVENCY REMEDIES ON INTERNATIONAL BUSINESS AND TECHNOLOGY APPENDIX I DEFINITIONS AND UNDERSTANDINGS ACTS & MODEL LAW Model Law on Cross-Border Insolvency ( Model Law ) developed by the United Nations Commission on International Trade Law ( UNCITRAL ) Canada (Bankruptcy and Insolvency Act ( BIA ), Companies Creditors Arrangement Act ( CCAA )) UK (Insolvency Act 2000 ( IA ), The Cross-Border Insolvency Regulations 2006 ( CBR )) US (United States Bankruptcy Code, Chapter 15) DEFINITIONS AND UNDERSTANDINGS CENTRE OF MAIN INTEREST ( COMI ): A location where a debtor conducts the administration of its interests on a regular basis, generally referring to a registered office in the absence of contrary proof, and that is ascertainable by a third party. The centre of main interest may be challenged by stakeholders, and changed by a court, even if proceedings had already commenced in a specific jurisdiction. Nevertheless, the COMI is established at the beginning of an insolvency process and any challenge is entertained at that time. The Model Law introduced the term centre of main interests ( COMI ) to identify where a foreign main proceeding should take place. Curiously, the Model Law fails to define the term although the UNCITRAL Legislative Guide on Insolvency Law defines COMI as the centre of main interests should correspond to the place where the debtor conducts the administration of its interests on a regular basis and that is therefore ascertainable by third parties. UK regulations adopted this definition.

2 In Canada, the CCAA (s.45) but not BIA, identifies a COMI to be in the absence of proof to the contrary, a debtor company s registered office is deemed to be the centre of its main interests. US Chapter 15 spells COMI as the center of main interests but also does not provide a definition. The EU Regulation also does not provide a COMI definition but uses the notion to determine where main proceedings should occur. In the case of Eurofood IFSC Ltd., the European Court of Justice set out principles to be used in determining a COMI. ESTABLISHMENT: A permanent operational location that is used by an enterprise to conduct its business. Canadian insolvency law does not provide a definition but rather relies upon the notion of the centre of main interest, with there being other centres that are not the main interest. UNCITRAL: Model Law Chapter 1, Article 2 (f) and UK: CBR Chapter 1, Article 2 (e) Establishment means any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services. US Bankruptcy Code: Chapter 15 Sec 1502 (2) "Establishment means any place of operations where the debtor carries out a nontransitory economic activity FOREIGN MAIN PROCEEDING: A judicial or administrative proceeding in the jurisdiction where a debtor has its centre of main interests. This will be a foreign jurisdiction where assets and affairs of the debtor are subject to action under insolvency or restructuring legislation, and in which the interests of all creditors are being managed. This also applies to interim proceedings. UNCITRAL: Model Law Chapter 1, Article 2 (b) and UK: CBR Chapter 1, Article 2 (g) Foreign main proceeding means a foreign proceeding taking place in the State where the debtor has the centre of its main interests. Canada: BIA s.268 (1) and CCAA s.45 Foreign main proceeding means a foreign proceeding in a jurisdiction where the debtor has the centre of the debtor s main interests. US Bankruptcy Code: Chapter 15 Sec 1502 (4) Foreign main proceeding means a foreign proceeding pending in the country where the debtor has the center of its main interests.

3 FOREIGN NON-MAIN PROCEEDING: Any other foreign proceeding than a foreign main proceeding. UNCITRAL: Model Law Chapter 1, Article 2 (c) "Foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment UK: CBR Chapter 1, Article 2 (h) "Foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment Canada: BIA s.268 (1) and CCAA s.45 (1) Foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding. US Bankruptcy Code: Chapter 15 Sec 1502 (5) "Foreign non main proceeding means a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment FOREIGN REPRESENTATIVE: An entity authorized to act as a representative in a foreign proceeding, to administer and/or monitor a debtor for the purpose of reorganization or liquidation. UNCITRAL: Model Law Chapter 1, Article 2 (d) "Foreign representative means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor s assets or affairs or to act as a representative of the foreign proceeding. Canada: BIA s.268 Foreign representative means a person or body, including one appointed on an interim basis, who is authorized, in a foreign proceeding in respect of a debtor, to (a) administer the debtor s property or affairs for the purpose of reorganization or liquidation; or (b) act as a representative in respect of the foreign proceeding. Canada: CCAA s.46 Foreign representative means a person or body, including one appointed on an interim basis, who is authorized, in a foreign proceeding respect of a debtor company, to (a) monitor the debtor company s business and financial affairs for the purpose of reorganization; or (b) act as a representative in respect of the foreign proceeding.

4 UK: CBR Chapter 1, Article 2 (j) Foreign representative means a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor s assets or affairs or to act as a representative of the foreign proceeding US Bankruptcy Code: Title 11, Chapter 1, Sec 101 (24) The term foreign representative means a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor s assets or affairs or to act as a representative of such foreign proceeding. RULE OF PAYMENT IN CONCURRENT PROCEEDINGS HOTCHPOT RULE These rules ensure that all creditors receive equitable treatment and share distributions from an insolvent estate equally, as per their priority ranking. A distribution to creditors being calculated in a home jurisdiction must take account of other payments made in respect of the same claims in foreign jurisdictions, to ensure all creditors in a class receive an equivalent distribution. UNCITRAL: Model Law Chapter 1, Article 32. Without prejudice to secured claims or rights in rem, a creditor who has received part payment in respect of its claim in a proceeding pursuant to a law relating to insolvency in a foreign State may not receive a payment for the same claim in a proceeding under [identify laws of the enacting State relating to insolvency] regarding the same debtor, so long as the payment to the other creditors of the same class is proportionately less than the payment the creditor has already received. Guide to enactment of the UNCITRAL Model Law on cross-border insolvency Paragraph 48. Another rule designed to enhance coordination of concurrent proceedings is the one on rate of payment of creditors (article 32). It provides that a creditor, by claiming in more than one proceeding, does not receive more than the proportion of payment that is obtained by other creditors of the same class. Paragraph 198. The rule set forth in article 32 (sometimes referred to as the hotchpotch rule) is a useful safeguard in a legal regime for coordination and cooperation in the administration of cross-border insolvency proceedings. It is intended to avoid situations in which a creditor might obtain more favourable treatment than the other creditors of the same class by obtaining payment of the same claim in insolvency proceedings in different jurisdictions. For example, an unsecured creditor has received 5 per cent of its claim in a foreign insolvency proceeding; that creditor also participates in the insolvency proceeding in the enacting State, where the rate of distribution is 15 per cent; in order to put the creditor in the equal position as the other creditors in the enacting State, the creditor would receive 10 per cent of its claim in the enacting State. UK: CBR Chapter 1, Article 32. Without prejudice to secured claims or rights in rem, a creditor who has received part payment in respect of its claim in a proceeding pursuant to a law relating to insolvency in a foreign State may not

5 receive a payment for the same claim in a proceeding under British insolvency law regarding the same debtor, so long as the payment to the other creditors of the same class is proportionately less than the payment the creditor has already received. Canada: BIA s. 283 and CCAA s. 60 (1) If a bankruptcy order, a proposal or an assignment is made in respect of a debtor under this Act, the following shall be taken into account in the distribution of dividends to the debtor s creditors in Canada as if they were a part of that distribution: (a) the amount that a creditor receives or is entitled to receive outside Canada by way of a dividend in a foreign proceeding in respect of the debtor; and (b) the value of any property of the debtor that the creditor acquires outside Canada on account of a provable claim of the creditor or that the creditor acquires outside Canada by way of a transfer that, if the transfer were subject to this Act, would be a preference over other creditors or a transfer at undervalue. (2) Despite subsection (1), the creditor is not entitled to receive a dividend from the distribution in Canada until every other creditor who has a claim of equal rank in the order of priority established under this Act has received a dividend whose amount is the same percentage of that other creditor s claim as the aggregate of the amount referred to in paragraph (1)(a) and the value referred to in paragraph (1)(b) is of that creditor s claim. US Bankruptcy Code Sec Without prejudice to secured claims or rights in rem, a creditor who has received payment with respect to its claim in a foreign proceeding pursuant to a law relating to insolvency may not receive a payment for the same claim in a case under any other chapter of this title regarding the debtor, so long as the payment to other creditors of the same class is proportionately less than the payment the creditor has already received. Disclaimer The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views and opinions of Farber Financial Group. About the Author Michael Baigel is a Licensed Trustee in Bankruptcy with the Canadian financial advisory services firm of Farber Financial Group, which provides a variety of services to businesses, including insolvency and restructuring. He is a Chartered Insolvency and Restructuring Professional in Canada and also a UK qualified Insolvency Practitioner. Other specialty services provided by Farber include corporate finance, M&A/transaction advice, turnaround management, CFO resources, interim management, and fraud, forensic and asset recovery. For more information please visit: