Ontario Civil

Bankruptcy and Insolvency

Companies’ Creditors Arrangement Act

Initial application

Any claim against auditors barred as condition of lifting stay to permit class action to proceed

Bankrupt and others brought successful application pursuant to s. 18.6 of Companies’ Creditors Arrangement Act for order recognizing and giving effect to automatic stay of proceedings granted to Chapter 11 applicants in US proceedings. Lead plaintiffs in securities litigation brought motion to lift stay to permit them to proceed with securities class action in US against two individuals, Z and B. Motion granted on terms. Monitor was supported by several parties on motion, including counsel for Z and B, who did not oppose lifting of stay to permit action to proceed but on terms. Court had jurisdiction to lift stay and impose terms in exercising that jurisdiction. US counsel for lead plaintiffs swore that lifting stay would not prejudice bankrupt. Terms requested by monitor appeared to be acceptable. There could be no prejudice to lead plaintiffs to have made clear what was ordered in claims procedure order, plan of arrangement, and order sanctioning plan of arrangement. Neither monitor nor stakeholders who could be affected had to rely on letter from US bankruptcy counsel as to intentions of lead plaintiffs. Sanctioned plan did not release claims based on fraud or willful misconduct. Any claim asserted against auditors for fraud or willful misconduct would likely materially affect Canadian debtors as claim for indemnity against bankrupt or other Canadian debtors would likely be made and time and expense of defending such indemnity claim would be enormous and final distributions to creditors would be materially affected. It was appropriate that any claim against auditors be barred as condition of lifting stay to permit class action to proceed In balancing interests of all stakeholders, and need for Canadian debtors to be finalized without significant cost and risk. It was appropriate for order to state that except for proven claim of fraud or willful misconduct against Z or B, no recovery could be made against them but only against any applicable insurance policies, as provided for in sanctioned plea. Term requiring monitor’s written consent or court order for any subpoena, interrogatories or other process was appropriate, given nature of US litigation. Given enormous cost of bankruptcy proceedings in this case, some control had to be put in place.

Nortel Networks Corp., Re (2017), 2017 CarswellOnt 7971, Newbould J. (Ont. S.C.J. [Commercial List]).

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