Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Patrick Riesterer and Waleed Malik. Patrick Riesterer is an associate in the Insolvency and Restructuring group of Osler, Hoskin & Harcourt LLP and Waleed Malik is an articling student at Osler.
In an increasingly globalized world, courts have had to grapple with insolvency proceedings that cross jurisdictional boundaries. We have previously commented on this phenomenon in our articles about the decisions of the Canadian courts in Re Gyro-Trac (USA) Inc., Re LightSquared LP, and Re Massachussets Elephant & Castle Group, Inc. All of these decisions addressed the recognition of foreign proceedings under Part IV of the Companies’ Creditors Arrangement Act (“CCAA”). In a recent decision of the Ontario Superior Court of Justice [Commercial List] (the “Court), Re MtGox Co. Lt, 2014 ONSC 5811, the Canadian court addressed the test for recognizing a foreign bankruptcy proceeding under Part XIII of the Bankruptcy and Insolvency Act (“BIA”).  Like Part IV of the CCAA, Part XIII of the BIA largely adopted into Canadian law the United Nation Commission of International Trade’s (UNICTRAL) Model Law on Cross Border Insolvency. Part XIII of the BIA is analogous to Chapter 15 of the U.S. Bankruptcy Code.  
Background
MtGox Co. Ltd. (“MtGox”) was a Japanese corporation. It was incorporated in 2011. Between April, 2012 and February, 2014, MtGox operated an online exchange for buying and selling bitcoins. At one time, it was the largest online exchange for bitcoins in the world. However, in February, 2014, things took a turn for the worse. On February 10, MtGox halted all bitcoin withdrawals. On February 24, 2014, MtGox suspended all trading. MtGox had discovered that approximately 850,000 bitcoins held by the company had gone missing.
On February 28, 2014, MtGox filed a petition (the “Petition”) to commence a civil rehabilitation proceeding in the Tokyo Court. A civil rehabilitation proceeding in Japan is analogous to a restructuring proceeding under the CCAA or BIA in Canada or under Chapter 11 of the U.S. Bankruptcy Code. In April, the civil rehabilitation proceeding was discontinued because the Tokyo Court decided that it would be extremely difficult for MtGox to successfully restructure. On April 24, 2014, the Tokyo Court entered an order (the “Bankruptcy Order”) that formally commenced MtGox’s bankruptcy proceedings in Japan (the “Japanese Proceeding”). Nobukai Kobayashi was appointed as MtGox’s bankruptcy trustee (the “Trustee”).
On October 3, 2014, the Trustee applied to the Court for an order: (a) recognizing the Trustee as a “foreign representative” entitled to bring the application; (b) recognizing the Japanese Proceeding as a “foreign main proceeding”; and (c) staying all proceedings against MtGox.
Application of the Law
Pursuant to section 270(1) of the BIA, a Canadian court will recognize a proceeding in another jurisdiction if the proceeding is a “foreign proceeding” and the applicant before the court is a “foreign representative” as defined in section 268(1).
The Canadian court found that the Japanese Proceeding was a foreign proceeding because it was a judicial proceeding dealing with the collective interest of MtGox’s creditors under Japan’s Bankruptcy Act.  As such, the Japanese Proceeding met the broad definition of “foreign proceeding” found in the BIA. Section 268(1) defines a foreign proceeding very broadly to include judicial or administrative proceedings in a jurisdiction outside Canada “dealing with creditor’s collective interests generally under any law relating to bankruptcy or insolvency in which a debtor’s property and affairs are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation.”
The Canadian court also found that the Trustee was a foreign representative because the Trustee had the authority to administer MtGox’s estate and to act as a foreign representative. It was clear that the Trustee met the definition of “foreign representative” in the BIA. Section 268(1) defines a foreign representative as a person or body authorized 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.
A foreign proceeding can either be a “foreign main proceeding” or a “foreign non-main proceeding.” The Canadian court observed that it is advantageous to have a foreign proceeding recognized as a foreign main proceeding because, in that case, the BIA provides for an automatic stay halting any legal action against the debtor. There is no automatic stay for foreign non-main proceedings.
The key question for the Canadian Court is the determine is where the debtor has its “centre of main interests” (“COMI”). In the absence of evidence to the contrary, the jurisdiction in which the debtor company has its registered office is deemed to be the location of its COMI under section 268(2).  However, Canadian courts have enumerated a number of factors that can be used to rebut the presumption. For example, in Re Lightsquared LP, 2012 ONSC 2994, a Canadian court outlined a non-exhaustive list of three factors to consider when determining whether a debtor’s COMI is located in a particular jurisdiction: (a) the location is readily ascertainable by creditors; (b) the location is the one where the debtor’s principal assets or operations are found; and (c) the location is where the management of the debtor takes place.
The Trustee relied on a number of facts in support of its position that MtGox’s COMI was in Japan and not in Canada:

1. MtGox did not have any offices, subsidiaries, or assets in Canada;
2. MtGox had always been organized under the laws of Japan;
3. MtGox’s registered office, corporate headquarters, and books and records had always been located in Japan;
4. MtGox’s sole director had resided in Japan at all relevant times;
5. Most of MtGox’s bank accounts, including the primary account for operating its business, were located in Japan;
6. MtGox’s parent company provided operational and administrative services, and MtGox’s primary workforce in Japan;
7. MtGox’s website clearly disclosed that it was a Japanese corporation located in Japan; and
8. The Petition and an associated investigation by MtGox were both commenced in Japan under the supervision of the Tokyo Court.

On the basis of these facts, the Canadian court was satisfied MtGox’s COMI was in Japan. Therefore it recognized the Japanese Proceeding as a foreign main proceeding, resulting in an automatic stay of all actions against MtGox.
Conclusion
The MtGox decision shows that Canadian courts will generally apply the same test in assessing recognition orders sought under Part XIII of the BIA and Part IV of the CCAA and indicates that the three factors for assessing COMI enumerated by the Canadian Court in the Lightsquared decision remain the principle factors for a partying seeking recognition to address.
The MtGox case is also an excellent example of the advantage of having a foreign proceeding be recognized as a foreign main proceeding. As of the date of the Petition, MtGox had approximately 120,000 customers in 175 countries. MtGox had been named as a defendant in two class actions in the United States and one in Ontario. In addition to the order obtained from the Canadian court, the Trustee had also obtained a stay under Chapter 15 of the U.S. Bankruptcy Code. In the absence of these orders, and the associated stays, the Trustee would have to deal with the court systems in three different jurisdictions and fight lawsuits in multiple countries. Legislative enactments like Part XIII simplify the process significantly for a debtor with assets in multiple jurisdictions and allow it to restructure or liquidate while working with one, instead of many, legal systems and legal proceedings.

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