Modified Universalism in Canada: Does it Know No Bounds?

I. Introduction

Over the past three decades, modified universalism has emerged as the preferred approach in Canadian cross-border insolvency cases. While the term “modified universalism” is not statutorily defined, both case law and academic discourse have contributed to a more precise understanding of its underlying rationale, which involves some compromise of state sovereignty under domestic proceedings to advance international comity and cooperation.[1] As new decisions are released, Canadian courts continue to refine our understanding of modified universalism’s parameters and its application, with the recent judgment in Diebold Nixdorf, Incorporated emerging as a key precedent in this process.[2] This paper discusses the Diebold decision and its implications for the future of Canadian cross-border insolvency law. Specifically, it focuses on Morawetz C.J.’s decision to recognize a U.S. Chapter 11 Court’s interim financing (DIP) order that extended a super-priority charge over pre-filing debts, despite Section 11.2(1) of the CCAA prohibiting such relief in domestic proceedings.

II. Facts and Decision

The “DN Group,” comprised of the chapter 11 debtors and non-debtor affiliates, operated a global enterprise focused on retail and banking sector services, with the ultimate parent company, Diebold Nixdorf, headquartered in the U.S.[3] Despite a broad international footprint, the Group’s operations were centrally managed from the U.S., demonstrating a highly integrated business model.[4] Financially, the Canadian operations were relatively minor, contributing less than 3% to the Group’s total revenue and less than 8% to its total assets for the fiscal year ending December 31, 2022.[5]

Facing liquidity challenges, on June 1, 2023, various entities within the DN Group (the “Chapter 11 Debtors”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.[6] The U.S. Court granted several orders for the Chapter 11 Debtors, most notably an interim debtor-in-possession (DIP) order authorizing a $1.25 billion facility along with a charge ranking in priority ahead of all other secured debts.[7] Subsequently, the Chapter 11 Debtors brought an application, through their foreign representative, to the Ontario Superior Court of Justice (ONSC) to recognize the Chapter 11 proceedings as “foreign main proceedings,” and to enforce the U.S. court’s orders in Canada.[8]

Under Section 47 of the CCAA, two criteria must be met in order to recognize a foreign proceeding: the recognition application must specifically relate to a “foreign proceeding”, and the applicant must be officially designated as the “foreign representative” for that proceeding.[9] Relying on the fact that Canadian courts have consistently found Chapter 11 proceedings to be foreign proceedings for the purposes of the CCAA, and that the U.S. Court had authorized the applicant to act as its foreign representative on behalf of the Chapter 11 debtors, Morawetz C.J. determined that the requirements of Section 47(1) had been satisfied.[10]

Pursuant to Section 47(2) of the CCAA, upon recognizing a foreign proceeding, the court must then categorize it either as a “foreign main proceeding” or a “foreign non-main proceeding.”[11] A foreign main proceeding is defined as a “foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests” (“COMI”).[12] There is a presumption that the debtor’s registered office is its COMI, however this presumption is rebuttable with proof to the contrary.[13]

To determine the Debtors’ COMI, the Court examined various factors that pointed overwhelmingly towards the U.S. rather than Canada. The core operations of the Canadian entities within the DN Group were centralized in Ohio, at the North American headquarters. This location was crucial for strategic decision-making for the Americas, with the senior executive team in Ohio holding central control.[14] Notably, each Canadian entity in the Group had only one Canadian director, so as to fulfill statutory requirements for a Canadian resident director, with the remaining governance and operational roles filled by U.S.-based individuals.[15] This centralized governance was mirrored in the management of marketing, communications, and other key functions, all directed from the U.S., illustrating an integrated management approach.[16]

Financially, the Canadian entities were deeply integrated into the DN Group. They participated in a globally integrated cash management system, channeling payments to the group, and served as co-borrowers or guarantors for financial obligations governed by U.S. law. Moreover, their financial activities were centrally reported and consolidated at the Group’s Ohio headquarters.[17] The collective assessment of these factors showed that, despite having registered offices in Ottawa and Calgary, the Canadian entities’ operational and managerial activities were predominantly centralized and executed from the U.S. This led Morawetz C.J. to recognize the Chapter 11 proceedings as foreign main proceedings.[18] Top of FormTop of Form

The recognition of the foreign proceedings as main proceedings not only triggered a mandatory stay of proceedings but also enabled the foreign representative to seek additional discretionary relief from the Court.[19] A particularly significant request was for a “roll-up” DIP, in which the DIP lender’s pre-filing claims would be covered by the DIP charge.[20] While roll-up DIPs are prohibited by Section 11.2(1) in domestic CCAA proceedings, Section 49(1) empowers courts to issue any orders they deem necessary to protect the debtor’s property or the interests of the creditors.[21] Top of FormBottom of Form

The applicant argued that recognizing the DIP order was vital for safeguarding the debtor’s property, served the creditors’ interests and would provide essential liquidity for the DN group’s ongoing operations and restructuring.[22]

Accepting this argument, the Court then evaluated the potential effects of recognizing the DIP order on any creditor groups, finding that none of the Canadian stakeholders would be significantly disadvantaged.[23] As such, it held that the principles of comity supported the recognition of the DIP order in Canada.[24]

III. Analysis

Diebold exemplifies the modern interpretation of modified universalism in Canada, showcasing the liberal and purposive approach adopted by Canadian courts. This approach carefully balances the imperative to uphold domestic legal norms with the practical challenges posed by cross-border insolvencies. Modified universalism has been evolving within the Canadian insolvency jurisprudence for several decades, but it was not always the norm.

Prior to the adoption of the UNCITRAL Model Law on Cross-Border Insolvency in 2009 (Model Law),[25] the development of modified universalism was initiated by Canadian courts through their adherence to the common law principle of comity.[26] The seminal Supreme Court of Canada (SCC) case of Morguard Investment Ltd v De Savoye laid the groundwork for recognizing foreign legal proceedings, emphasizing the need for a “real and substantial connection” to the foreign jurisdiction.[27] The 1997 amendments to the CCAA built upon the Morguard principles, establishing a structured approach to cross-border insolvencies that endorsed a version of universalism tailored to the Canadian context. However, there were wrinkles in the jurisprudence, particularly in bankruptcy liquidation cases.  For instance, in Re Singer Sewing Machine, Registrar Funduk rejected an application to enforce a U.S. Chapter 11 order against a Canadian corporation having all its assets in Canada, stating that:

Comity does not require me to recognize a chapter 11 order over a Canadian company carrying on business only in Canada and whose assets are all in Canada. Who the shareholders are is irrelevant and who the creditors are is irrelevant. Under Alberta law neither gives an American bankruptcy court jurisdiction over Singer Canada.[28] 

While Singer arguably aligned with prior and more territorialist cases,[29] it marked a significant departure from the liberal and purposive interpretation of modified universalism set out in CCAA cases such as Babcock & Wilcox.[30] In Babcock & Wilcox Canada, Farley J. endorsed a more robust view of comity, emphasizing the need for cross-border cooperation and coordination in order to ensure successful restructurings for the benefit of all stakeholders.[31]

In Holt Cargo Systems, a Belgian bankruptcy trustee asked the SCC to recognize bankruptcy proceedings in Belgium that would have the effect of priming a maritime lien granted by the Federal Court of Canada, and to embrace a “universalist” approach for insolvencies involving multiple jurisdictions.[32] The SCC declined this request, stating that:

The desirability of international coordination is an important consideration. In some cases, it may be the controlling consideration. The courts nevertheless have to exercise their discretion to stay or not to stay domestic proceedings to all of the relevant facts of a particular case.[33]

The 2007 amendments to the CCAA incorporated most of the key provisions of the Model Law, fully replacing the existing cross-border provisions in the CCAA  and BIA with a more comprehensive framework.[34] Following these amendments, cases including Hartford,[35] Xinergy,[36] and Pelletier[37] saw foreign representatives successfully obtain recognition of orders for forms of relief that were not ordinarily available in domestic proceedings under the CCAA and BIA. These cases further elucidated the scope and application of modified universalism under Canada’s updated cross-border insolvency regime.

Diebold reaffirms the liberal and purposive approach to modified universalism reflected in earlier cross-border cases, demonstrating how Canadian courts have broadened their understanding of modified universalism over the past few decades. This broad interpretation of modified universalism seeks to enhance coordination and cooperation with foreign courts, reinforcing Canada’s commitment to facilitating the fair and efficient resolution of cross-border insolvencies.

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