Recognition of U.S. Plan Confirmation Orders by Canadian Courts

Part IV of the CCAA
The Companies’ Creditors Arrangement Act (CCAA) is one of Canada’s two principal statutes that govern the restructuring of insolvent debtors. (The second is the Bankruptcy and Insolvency Act, RSC 1985, c B-3.) The CCAA applies to insolvent companies with $5,000,000 or more in claims against them.

Amendments to the CCAA came into force in September 2009. The amendments are based on the UNCITRAL Model Law on Cross Border Insolvency and involve changes to Part IV of the CCAA, which pertains to cross-border restructurings.

To engage Part IV of the CCAA, which pertains to cross-border restructurings, the foreign representative of a debtor company can seek recognition from the Canadian court of its foreign proceeding. A foreign representative is a person or body that has been appointed and is authorized to monitor the debtor company’s business and financial affairs for the purpose of reorganization or to act as the representative in respect of the foreign proceeding. Where the Canadian court is satisfied that the foreign proceeding is a judicial or administrative proceeding in a jurisdiction outside of Canada, dealing with creditors’ collective interests generally under laws relating to insolvency and the debtor company’s affairs are under the control or supervision of a foreign court; and where the Canadian court verifies that the foreign representative is who it claims to be, the foreign proceeding will be recognized by the Canadian court as a foreign main proceeding or a foreign non-main proceeding. Once recognized as a foreign main proceeding or a foreign non-main proceeding, the Canadian court may then make any order, on application by the foreign representative that it considers appropriate, including the recognition in Canada of orders made by the foreign court.

Where a foreign proceeding is recognized as a foreign main proceeding, which is a foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests, the court must issue an order (1) staying all proceedings that have been taken or might be taken against the debtor company under certain specified insolvency legislation, (2) restraining and prohibiting the commencement of any action, suit, or proceeding against the debtor company, and (3) prohibiting the debtor company from selling or disposing of, outside the ordinary course of business, its property in Canada. Where a foreign proceeding is recognized as a foreign non-main proceeding, which is a foreign proceeding other than a foreign main proceeding, the court may issue an order providing for the stays, restraints, and prohibitions required of the court for foreign main proceedings. Where the foreign proceeding is recognized as a foreign non-main proceeding, the court may not order a stay in respect of proceedings that have been taken or might be taken against the debtor company under certain specified insolvency legislation.

Background
Xerium Technologies Inc. and its subsidiaries, including Xerium Canada Inc., manufacture and supply products used in paper production. As global demand for paper products declined in 2008 and 2009, Xerium and its subsidiaries experienced financial difficulties.

Anticipating breaches of financial covenants under its credit facilities, Xerium entered into discussions with its lenders to explore restructuring alternatives. Xerium, its subsidiaries, and its principal lenders developed a pre-packaged plan of reorganization, pursuant to the terms of which Xerium commenced solicitation of votes. The plan was overwhelmingly accepted on March 26, 2010, by the classes of creditors entitled to vote.

On March 30, 2010, Xerium and its subsidiaries commenced cases in Delaware under Chapter 11 of the U.S. Bankruptcy Code. The next day, the Bankruptcy Court entered an order, scheduling a combined hearing to consider approval of the disclosure statement, the solicitation procedures, and the forms of ballots as well as confirmation of the plan. On April 1, 2010, the Ontario Court made an order that, among other things, recognized the Chapter 11 cases as a foreign main proceeding, recognized Xerium as a foreign representative, and gave effect to the automatic stay provided for under Section 362 of the Bankruptcy Code.

Decision of the U.S. Bankruptcy Court
On May 12, 2010, the Bankruptcy Court found that the notice and content of the disclosure statement and the voting process were appropriate, met the requirements of the Bankruptcy Code, and fairly considered the interests of those affected. Accordingly, the Bankruptcy Court approved the disclosure statement and confirmed the plan.

Decision of the Ontario Court
On May 14, 2010, the Ontario Court made an order that recognized the plan and confirmation order together with several other orders made by the Bankruptcy Court in the Chapter 11 cases. The Ontario Court found that the plan provided for substantial recoveries to creditors in the “impaired” classes, including existing equity holders. The Ontario Court was also satisfied that it had the authority and indeed the obligation to grant the recognition sought and observed that such recognition was precisely the kind of comity in international insolvency contemplated by Part IV of the CCAA.

The court referred to the purpose of Part IV, as identified in Section 44 of the CCAA, and also considered the nonexclusive list of factors set out in In re Babcock & Wilcox Canada Ltd., a case decided under provisions of the CCAA that previously dealt with international insolvencies. The factors that favored recognition of the confirmation order were

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