Sales or Plans: A Comparative Account of the “New” Corporate Reorganization
A great deal of scholarly ink has been spilled over last year’s well-publicized sales of Chrysler and GM, each authorized outside a Chapter 11 plan. Some of that ink is available for review . . . here.
It’s worth noting that both Chrysler and GM have enjoyed a considerable presence in Canada. Indeed, the Canadian government participated in the automakers’ Chapter 11 cases. Yet their bankruptcy sales were not recognized under Canadian cross-border insolvency law, nor were Canadian insolvency proceedings ever initiated.
Seton Hall’s Stephen Lubben and York University’s Stephanie Ben-Ishai collaborated last month to offer an answer to that question. The essence of their article, “SALES OR PLANS: A COMPARATIVE ACCOUNT OF THE ‘NEW’ CORPORATE REORGANIZATION” comes down to two points of difference between the Canadian reorganization process and US Chapter 11 – speed and certainty – and is captured in the following excerpt:
[B]oth the United States and Canada have well-established case law that supports the “pre-plan” sale of a debtor’s assets. The key difference between the jurisdictions thus turns not on the basic procedures, but rather the broader context of those procedures . . . . [I]n the United States it is generally possible to sell a debtor’s assets distinct from any obligations or liabilities associated with those assets. Indeed, the only obligations that survive such a sale are those that the buyer willing[ly] accepts and those that must survive to comport with the U.S. Constitution’s requirements of due process.
[I]n Canada the debtor has less ability to “cleanse” assets through the sale process. Particularly with regard to employee claims, a pre-plan sale under the CCAA is not apt to be quite as “free and clear” as its American counterpart.
The jurisdictions also differ on the point at which the reorganization procedures – and the sale process – can be invoked. Canada, like most other jurisdictions, has an insolvency prerequisite for commencing [a reorganization] proceeding, whereas Chapter 11 does not. And the Canadian sale process is tied to the oversight of cases by the [court-appointed] monitor: without the monitor’s consent, it is unlikely that a Canadian court would approve a pre-plan asset sale. In the United States, on the other hand, there is no such position. Accordingly, a [US] debtor can seek almost immediate approval of a sale upon filing. Finally, there remains some doubt and conflicting case law in Canada about the use of the CCAA in circumstances that amount to liquidation, particularly following an asset sale. In the US, it is quite clear that Chapter 11 can be used for liquidation.
[T]hese latter factors are the more likely explanations for the failure to use the CCAA in [GM’s and Chrysler’s] cases . . . . [I]t is the questions of speed and certainty that mark the biggest difference between the two jurisdictions . . . . In the case of GM and Chrysler, where the governments valued speed above all else, these issues came to the fore.
The article offers a very interesting perspective on the strategic use of specific insolvency features of different jurisdictions to effect cross-border bankruptcy sales, and is well worth the read.