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International Newswire A quarterly newsletter from the , financial restructuring and team at Norton Rose Fulbright

Fall 2019

In this issue:

To our clients and friends Keeping up with the Joneses: In bold cross-border move, the DIFC enacts new insolvency law And, more keeping up with the Joneses: The new EU restructuring directive and reforms in the United Kingdom Ontario appellate court sets some limits on selling free and clear of encumbrances in Canada: Third Eye Capital Corporation v. Dianor Resources Inc. The brewing controversy in Australia surrounding the application of the s 553C set-off defence to unfair preference claims InternationalLegal Considerations Restructuring For Employers Newswire of Domestic Workers

Contents

To our clients and friends 03

Feature articles

Keeping up with the Joneses: In bold cross-border 05 move, the DIFC enacts new insolvency law

And, more keeping up with the Joneses: The new 11 EU restructuring directive and reforms in the United Kingdom

Ontario appellate court sets some limits on selling 15 free and clear of encumbrances in Canada: Third Eye Capital Corporation v. Dianor Resources Inc.

The brewing controversy in Australia surrounding 19 the application of the s 553C set-off defence to unfair preference claims

International Restructuring Newswire International Restructuring Newswire is published by Norton Rose Fulbright and is not a substitute for fact-specific legal counsel.

International Restructuring Newswire Published by Norton Rose Fulbright – Fall 2019 – Issue 8

Editor Publication Coordinator David Rosenzweig Helen M. Lamb +1 (212) 318-3035 +1 (212) 408-5172 [email protected] [email protected]

Attorney advertising.

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To our clients and friends:

As we put this issue to bed, the media is replete with stories regarding the timing of the next recession. But a recession is anything but a sure thing. As discussed in Blackstone’s 2019 Fourth Quarter Report, the indicators are decidedly mixed. There are signs of an impending recession: GDP growth in the US is slowing as the effects of 2017 tax reform wear off. And the most reliable recession signal is “flashing”, as the ten-year to two-year Treasury yield spread is inverted – which was the case before each of the past five recessions. But, conversely, consumer income and spending continue to grow, and the household debt burden remains low. So the signs of an upcoming recession in the US are decidedly ambiguous.

Globally, however, Blackstone reports that the economic outlook is dimming. Growth forecasts for 2019 and 2020 have been revised downward and, without a Brexit agreement, UK GDP growth is expected to be 2.5 percent lower through 2023. Further complicating the picture in the US is the enormous political uncertainty caused by the pending impeachment proceedings. And the trade war between the US and China is directly impacting China’s growth which has been largely fueled by trade with the US.

With all of this global economic uncertainty, what better time to read the current issue of our International Restructuring Newswire, with articles from four different countries of the Norton Rose Fulbright network.

With this issue we welcome our new editor, David Rosenzweig. David is a Norton Rose Fulbright partner in the New York office and focuses his practice on cross- border and .

Enjoy the issue.

Howard Seife Global Head Financial Restructuring and Insolvency

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In the news

Cross-Border Restructuring – Australian Restructuring Insolvency & INSOL World A Collaborative Approach Turnaround Association Mark Craggs (London), Guillaume Rudelle New York, NY: September 24, 2019 Sydney, Australia: October 3, 2019 (Paris) and Koen Durlinger (Amsterdam) The financial restructuring and insolvency Noel McCoy and Jonathon Turner presented have contributed an article, “The New EU group co-hosted a client program with the to the Australian Restructuring Insolvency Restructuring Directive”, to the Q3 2019 Cayman law firm, Harneys on September &Turnaround Association Sydney Forum edition of INSOL World (of which Mark is 24. The event consisted of three panel on legislative reforms under Australian co-editor), which provides UK, French and sessions comprised of industry professionals law designed to prevent pre-insolvency Dutch perspectives on the new EU Directive presenting on a variety of cross-border transactions leaving employee on preventive restructuring frameworks, restructuring issues. Eric Daucher moderated worse off. on discharge of debt and disqualifications, a panel where Andrew Rosenblatt and Alex and on measures to increase the efficiency Mufford spoke from the perspective of US and R3 Midlands Regional Meeting of procedures concerning restructuring, Australian law and practice. Birmingham, UK: October 8, 2019 insolvency and discharge of debt. Mark Craggs presented on insolvencies in the Retiring LIBOR – Breakfast Briefing Aerospace Sector at the Midlands Regional International Corporate Rescue London, UK: September 27, 2019 Meeting of R3, the Association of Business Noel McCoy’s article “The Singularis Work- Radford Goodman took part in a panel Recovery Professionals, together with around? Overcoming Limitations to the discussion concerning the transition away Matthew Ward of EY. Common Law Power of Assistance for Foreign from IBOR benchmarking at the end of 2021. Insolvency Investigations” was recently The audience consisted a cross-section of the New York State Bar Association published in International Corporate Rescue London financial services sector. Radford Tokyo, Japan: November 8, 2019 (Volume 16, Issue 4). The article considers spoke to the litigation risks associated with David Rosenzweig will be speaking on a an innovative approach to assist in cross the transition. cross-border insolvency panel at the New border insolvency investigations for offshore York State Bar Association International jurisdictions. Insolvency and restructuring law reform in Section’s Global Conference in Tokyo, Japan Spain Webinar on November 8, 2019. Australian Restructuring and Insolvency Sydney, Australia: September 30, 2019 Journal Noel McCoy co-presented in a webinar Morocco Bankruptcy Law Reform Noel McCoy and Gabe Perrottet had an article hosted by University of Sydney Professor Casablanca, Morocco: November 12-13, published in the Australian Restructuring and Jason Harris and Dr Zofia Bednarz, University 2019 Insolvency Journal (September 2019) entitled of Málaga, Spain to discuss Spanish Mark Craggs will be participating in a “Understanding the ‘Better Outcome Test’ in insolvency restructuring law and cross-border workshop organized by the US Department of s588GA of the Corporations Act.” The article insolvency. Commerce’s Commercial Law Development examines new legislative provisions to relieve Program relating to the implementation of directors of insolvent trading liability if they Morocco’s new bankruptcy laws. undertake a business restructure.

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Keeping up with the Joneses: In bold cross-border move, the DIFC enacts new insolvency law Laura Smith

The Dubai International Financial Centre (the “DIFC”), one of the institutions, including wealth funds leading international financial hubs in the Middle East, Africa and private investors, and it also hosts and South Asia (the “MEASA”) region, has recently announced multinationals, retail outlets, cafés, restaurants, residential space, public the enactment of the new DIFC Insolvency Law, Law No. 1 of 2019 green spaces, hotels, and art galleries. (the “New DIFC Insolvency Law”), which became effective in June As of June 2019, the DIFC had over 2289 2019. The introduction of the New DIFC Insolvency Law, comes active registered companies, including after the financial collapse of Abraaj Group, which was recently 671 financial firms and the size of its fined a record US$315 million by the DIFC’s financial regulator, workforce stood at more than 24,000 professionals.1 The financial services the Dubai Financial Services Authority, after allegations of fraud firms that joined in 2019 include and mismanagement. Importantly, the New DIFC Insolvency Law Maybank Islamic Berhad from Malaysia, which will repeal and replace the Insolvency Law of 2009 and Cantor Fitzgerald from the United was the subject of substantial research and global benchmarking States, Atlas Wealth Management from introduces a completely new rehabilitation provision for Australia, and Mauritius Commercial Bank.2 Certain other non-financial distressed companies in the DIFC in addition to the previously firms have also recently joined the DIFC existing procedures such as company voluntary arrangements, including Guidepoint MEA, Medtronic and . In addition, the New DIFC Finance Hungary Kft., and Network Insolvency Law’s incorporation of the UNCITRAL Model Law on International.3 Moreover, in September Cross-Border Insolvency is hoped to facilitate a more efficient and 2019, it was further announced that the DIFC had risen up the ranks of the Global effective restructuring regime, allowing the DIFC to play a more Financial Centres Index (the “GFCI”) to substantial role in cross-border insolvencies in the future. the number eight position, representing the DIFC’s highest ever ranking.

Scope of the New DIFC of the United Arab Emirates with its own Given its rapid growth as a financial Insolvency Law civil and commercial laws which are centre, it is unsurprising that the DIFC written in English and actually to needed to update its existing insolvency The New DIFC Insolvency Law English law in the event of an ambiguity. regime in order to keep up with other applies only to entities registered and The DIFC also has its own courts, with globally significant jurisdictions in the operating within the DIFC. The DIFC judges taken from leading common international insolvency arena. With was established in 2004 and is an law jurisdictions including England, the goal of promoting the rehabilitation independent jurisdiction separate from Singapore, and Hong Kong. The DIFC of viable businesses that are part of the the Emirate of Dubai and the federal law houses a large number of financial DIFC while addressing the continuing

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needs of the various stakeholders termination based upon insolvency is When the company or the administrator involved, the DIFC made several key deemed ineffective unless the company appointed has a proposal for a changes as part of its enactment of the agrees to termination, the court rehabilitation plan that is ready to New DIFC Insolvency Law including: approves such termination, or where be considered by the creditors and (1) the introduction of a in any sums due after the commencement shareholders, the company shall possession procedure known as of the moratorium period remain unpaid propose to the Court notice and voting rehabilitation; (2) the introduction of a for a period of more than twenty (20) procedures, which shall separately procedure that allows the management days where the company has agreed to classify secured creditors, unsecured of a company to be replaced by a court- pay such amounts. creditors and shareholders for the appointed administrator when there has purposes of voting. In connection with been mismanagement of or misconduct Immediately prior to the Rehabilitation any such proposal, the Rehabilitation by the company or management; (3) Plan Notification, the directors of Nominee or administrator (if appointed) enhancing and modernizing existing the company shall appoint one (1) must file a statement with the Court rules and procedures; and (4) the or more Rehabilitation Nominee(s). concerning: (1) whether the proposed incorporation of the UNCITRAL Model Each Rehabilitation Nominee must be rehabilitation plan has a reasonable Law on Cross-Border Insolvency. registered as an prospect of being approved and under Part 10 of the new law. implemented; (2) whether the company Notwithstanding the appointment of the is likely to have sufficient funds Change No. 1: New Rehabilitation Nominee, the directors available to it during the moratorium to rehabilitation procedure of the company will be permitted to enable it to carry on its business; and manage the company’s affairs during (3) whether meetings of the company Part 3 of the New DIFC Insolvency Law the implementation of a rehabilitation and its creditors and shareholders introduces a new concept referred to plan unless there is evidence that should be summoned to consider the as “rehabilitation,” which mirrors the such officers or management were proposed rehabilitation plan. Approval debtor in possession regime of chapter involved in fraud or mismanagement of any proposed notice and voting 11 in the US. A company is eligible for of the company, and in these cases, procedures is to take place during a “rehabilitation” where it is or is likely the management of the distressed separate “Directions Hearing” upon to become unable to pay its debts and company could be taken over by a no less than ten (10) days’ notice to there is a reasonable likelihood of a court-appointed administrator (which creditors and shareholders. Approval successful rehabilitation plan being is discussed in further detail below). of a rehabilitation requires at least 75 reached between the company, its In light of the continuing existence of percent of creditors in each class that creditors, and shareholders. To initiate the company, the court is permitted are present and voting to support the a rehabilitation proceeding, the board to sanction new priority (debtor in plan unless the class of creditors or of the company notifies the court in possession-type) funding during the shareholders are deemed unimpaired writing that they intend to make a rehabilitation process. This debt can be under such plan, in which case, a proposal to the company’s creditors of a unsecured or secured, and if secured, solicitation of the classes votes is not rehabilitation plan (the “Rehabilitation such security can be over previously required. After voting has concluded Plan Notification”) and upon such notice unsecured assets, on a junior basis to and creditors have had the further the court will convene and automatically existing security, or on a senior or equal opportunity to object to the proposed initiate a 120 day moratorium period, basis with an existing security holder, rehabilitation plan, the court is required which applies to all creditors. In but only if there is adequate protection to hold a “Post Plan Hearing,” wherein addition to this moratorium period, given to the existing security holder. it shall sanction (i.e., approve) the any contractual provision allowing rehabilitation plan upon a finding that:

The New DIFC Insolvency Law introduces a new concept referred to as “rehabilitation,” which mirrors the debtor in possession regime of chapter 11 in the US.

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• The plan complies with the law and for Rehabilitation has been made and wrongdoers repay, restore or account has been proposed in good faith. there is evidence of mismanagement for the money or other property of the or misconduct by the company or Company which they believe has been • The arrangement is not unfairly management. Upon appointment, misapplied or retained. Additionally, prejudicial to each class of creditors the administrator shall manage the Part 11 of the New DIFC Insolvency Law and to the general body of creditors affairs, business, and property of the includes some additional provisions taken as a whole. company and can seek approval of which modernize existing procedures a Rehabilitation Plan under Part 3 by introducing the use of websites in • Either (A) all classes of creditors have of the New DIFC Insolvency Law. An section 140 and remote attendance at voted to accept the plan (or have administrator can likewise be appointed meetings in section 139 for purposes of been deemed to accept the plan) for the purpose of seeking approval bringing the New DIFC Insolvency Law or (B) at least one class of creditors of a Voluntary Arrangement under up to speed with the latest technologies which would be impaired by the plan Part 2 of the New DIFC Insolvency of today’s business world. approves it. Law, seeking approval of a under the Companies Law, • There have been no material or investigating fraud or wrong doing by Change No. 4: Incorporation violations of the notice and voting the company and/or its management. of the UNCITRAL Model Law procedures approved by the Court at The administrator possesses many rights on Cross-Border Insolvency the Directions Hearing. including the general power to remove any director of the company and appoint Finally and perhaps one of the most • No is worse off than that another director and can also call any important aspects of the New DIFC creditor would have been in a meeting of the shareholders or creditors Insolvency Law is its incorporation winding-up of the company. of the company. Upon discharge, of the UNCITRAL Model Law on the administrator is also entitled to Cross-Border Insolvency (the “Model • The holder of any claims junior to any compensation for his services as well as Law”). The Model Law was originally dissenting class will not be paid out reimbursement of any properly incurred created to assist foreign countries to any amount before the debtor pays expenses, both of which are to be given supplement their existing insolvency the dissenting class in full. priority over other unsecured debts of laws with a modern legal framework to the company. more effectively address cross-border If at the Post Plan Hearing the court does insolvency proceedings. The DIFC’s not sanction the Rehabilitation Plan, the adoption of the Model Law in Part 7 of court is required to immediately proceed Change No. 3: Enhancing the New DIFC Insolvency Law not only to take steps to wind up the company. and modernizing existing promotes the DIFC’s goal of continuing procedures to grow its presence in the international business world, but should also Change No. 2: Introduction Part 6 of the New DIFC Insolvency provide for a more predictable and of court-appointed Law further enhances the rules on coordinated approach for the many administrators voluntary and compulsory winding up cross-border businesses in the DIFC and includes more detail with regard to which may eventually be involved Part 4 of the New DIFC Insolvency Law “” in addition to a new in multi-jurisdictional restructuring allows for the appointment of a court- section called “misconduct in course proceedings. Specifically, the Model Law appointed administrator, who like a of winding up.” As to both “wrongful will apply where assistance is sought (1) Rehabilitation Nominee, must be a trading” and “misconduct in course in the DIFC by a foreign court or foreign registered insolvency practitioner. First, of winding up,” section 115 entitled representative in connection with as noted above, one or more creditors “Remedy” applies and gives those foreign proceeding; (2) in a foreign state may move for the appointment of an aggrieved the right to file an application in connection with proceedings brought administrator where an application with the court requesting that these under the New DIFC Insolvency Law;

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(3) where there are foreign proceedings be a predictable, orderly process in The administrator and proceedings under the New DIFC place to aid companies who may find Insolvency Law, in respect of the same themselves in . As with possesses many rights debtor, running in parallel; or (4) where any new law, success will depend on creditors or other interested persons its frequency of use and effectiveness including the general power in a foreign state have an interest in in practice, however, based upon requesting the commencement of, or the DIFC’s established court system to remove any director of participating in, a proceeding under the supported by professionals that are New DIFC Insolvency Law. skilled in business rescues, the New the company and appoint DIFC Insolvency Law should achieve its intended purpose of promoting another director and can Conclusion a modern and efficient bankruptcy restructuring regime for the DIFC. also call any meeting of the Following recent legislative changes by the UAE and Saudi Arabia to its shareholders or creditors of insolvency procedures, the New Laura Smith is an associate in our Dallas DIFC Insolvency Law represents office in the firm’s financial restructuring the company. and insolvency group. yet another significant advance in insolvency legislation in the Middle East and should allow the DIFC to better position itself as player in cross-border restructurings in the future. The New DIFC Insolvency Law may also serve to raise the DIFC’s attractiveness as an investment location as there will now

1 DIFC Boosts UAE Financial Sector Development and Reports Significant Growth During First Half of 2019(July 29, 2019), http://www.mondovisione.com/media-and-resources/news/difc-boosts-uae-financial-sector-development-and-reports- significant-growth-duri/.

2 Id.

3 Id.

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And, more keeping up with the Joneses: The new EU restructuring directive and reforms in the United Kingdom Matthew Thorn and Manhal Zaman

On 20 June 2019, the European Parliament and the Council regimes among Member States is published in the Official Journal of the European Union the text expected to bring greater transparency, of Directive 2019/1023 on preventive restructuring frameworks, legal certainty and predictability. on discharge of debt and disqualifications, and on measures to Key elements of the procedure envisaged increase the efficiency of procedures concerning restructuring, by the Restructuring Directive include: insolvency and discharge of debt, and amending Directive (EU) (a) remaining in possession of 2017/1132 (the “Restructuring Directive”). The Restructuring their assets and day-to-day operation of Directive forms a key part of the EU’s wider Capital Markets Union their business; (b) a stay of individual enforcement of actions; (c) the ability Action Plan. to propose a restructuring plan that includes a cross-class cram-down The Restructuring Directive seeks to will have exited the EU. In any event, mechanism whereby the plan is introduce a minimum standard among the UK has proposed its own standalone imposed on dissenting creditors in a EU Member States for preventive reforms similar to those contained in class (holding no less than 25 percent of restructuring frameworks available Restructuring Directive, on which draft claims in that class) and across classes to debtors in financial difficulty and legislation is awaited. (subject to certain protections); and (d) to provide measures to increase protection for new financing and other the efficiency of restructuring restructuring-related transactions. procedures. These new standards, once Why now? implemented, will represent a move While the concepts are commendable in for EU Member States further in the The 2015 EU seeking to save viable businesses from direction of debtor-in-possession-type (recast) provides for rules governing the , it is expected that there may insolvency regimes like chapter 11 allocation of jurisdiction for the opening be some stumbling blocks as Member in the United States and schemes of of insolvency procedures in the EU (and, States come to grips with implementing arrangement in the United Kingdom (and once opened, the rules applicable to these rules into their national laws. other common law jurisdictions). those procedures), but does not seek to address or regulate disparities in Unlike EU Regulations, EU Directives do national law between Member States. Key aspects: not have automatic effect and so Member The aim of the 2019 Restructuring States must implement the Restructuring Directive is to provide for a harmonised A formalised restructuring plan Directive into national law by 17 July minimum restructuring standard across with an option for a moratorium 2021, subject to a one year extension. the EU enabling “honest entrepreneurs” and cross-class cram-down to better manage financial difficulties And, of course, Brexit must enter the with a view to giving viable businesses a The Restructuring Directive lays down discussion, since it is expected that by “second chance”. Further, reducing the minimum standards for a restructuring the implementation deadline the UK substantive differences in pre-insolvency plan with class criteria similar to UK

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schemes of arrangement and in some aspects US chapter 11 proceedings. It is expected that the UK will have left the EU in It is a matter for national law to determine class segments but, under advance of the 2021 deadline for implementation of the the Restructuring Directive, at the very minimum, classes should be divided Restructuring Directive into national law. between secured and unsecured creditors. The reservation of class criteria to national law permits Member States to regulate class rights, voting rights debtor meeting certain requirements, examples of essential supply contracts and provide a legal framework for any has also been introduced. A stay can be to which this would be of particular contested claims. In addition, under implemented for four months in the first importance such as, supply of gas, the Restructuring Directive, Member instance and extended to a maximum electricity, water, telecommunication States can set their own level of what duration of 12 months, provided that the and card payment services. It is hard to constitutes a majority for approval debtor can effectively demonstrate that predict the impact that this change will purposes. However, such majority shall “relevant” progress has so far been made have once implemented into national not exceed 75 percent as a percentage in negotiations on the restructuring plan, law, which will depend in large part of debt, which is the threshold in and that such extension will not unfairly on the approach to implementation a UK scheme of arrangement. This prejudice the rights of affected parties in individual Member States; clearly, leaves room for Member States to or result in the liquidation of the debtor however, there is a balance to be struck lower the threshold in an attempt to under national law. between the benefits of company rescue market themselves as more attractive and imposing restrictions on freedom of restructuring venues. contract. Ban on ipso facto clauses Unlike a UK scheme, however, the Restructuring Directive allows the plan When a company enters an insolvency What about the United to be imposed on dissenting creditors procedure this may trigger contractual Kingdom? in separate classes. Similar to a US rights allowing suppliers to terminate chapter 11 plan, the Restructuring a contract due to the insolvency filing At the time of writing, the UK will leave Directive incorporates a cross-class (so-called ipso facto clauses) – even the EU on 31 October 2019 unless a cram-down mechanic where, if the plan where the relevant company has deal is struck or an extension agreed is not approved by a class, it may still complied with all its other obligations before such date. In any event, it is be approved by the court as long as under that contract. Undoubtedly, this expected that the UK will have left the dissenting classes are treated “at least can be detrimental to the continuation EU in advance of the 2021 deadline for as favourably as any other class of the of the business as a going concern. implementation of the Restructuring same rank” and “more favourably” than In an attempt to alleviate some of the Directive into national law. any junior classes, and the plan has been pain of struggling debtors, the new approved by (i) a majority of the voting regime includes a prohibition on the The UK has been working independently classes of affected parties, which must enforcement of certain ipso facto clauses to further develop and refine its own include at least one class of secured triggered by a debtor’s entry into an insolvency regime so as to protect its creditors or creditors senior to unsecured insolvency procedure or, in some status as a key forum for cross-border creditors, or (ii) one class of affected cases, the mere entry into restructuring restructurings. The main features of parties who are not equity holders, or negotiations. Again, this feature of the the UK’s proposals, which seem likely similar. Restructuring Directive mirrors a similar to form part of the legislation, include right granted under chapter 11 which (i) the introduction of a restructuring In an attempt to encourage ongoing allows a company to preserve business- moratorium (albeit with a shorter, 28- negotiations of a restructuring plan, critical contracts while still carrying out day duration, in the first instance) for the concept of a stay of individual restructuring negotiations. The recitals “prospectively insolvent” companies, (ii) enforcement actions, subject to the to the Restructuring Directive list certain a restructuring plan (akin to a scheme of

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arrangement but with the ability to Given experience to date under the matters discussed in this article that effect cross-class cram-downs) and Insolvency Regulation, we expect that there will be many developments still to (iii) restrictions on reliance on ipso there will be differences in approach and come in the coming days, months and facto clauses. outcome as between Member States, as years! well as a degree of competition in the It is not currently clear what form the approach they take to implementation, draft legislation will take or, indeed, with each Member State striving to Matthew Thorn is counsel and Manhal Zaman where it sits in the overall scheme of establish itself as the top choice forum is an associate in our London office in the firm’s financial restructuring and insolvency legislative priorities in the UK. for multi-jurisdictional restructurings. group. Since the Restructuring Directive does not prescribe exact means of transposing What does the future hold? its provisions into national law, we will not know the actual impact of The Restructuring Directive is this Directive until we have clarity commendable in its efforts to level the around how each Member State plans playing-field for preventive restructuring to implement the EU framework. The measures across Member States. It is UK will undoubtedly remain in the race perhaps not as ambitious in its scope too, albeit perhaps without restrictions as it could have been – notably, it does binding on continuing Member States. In not attempt to harmonise substantive the case of a hard Brexit, it is hoped that insolvency laws and it avoids other the implementation of the UK’s reforms contentious areas such as interference would be given a certain priority in with workers’ rights under existing order to help maintain the attractiveness legislation. of the UK as a forum for cross-border restructurings. It will be clear from the

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Ontario appellate court sets some limits on selling free and clear of encumbrances in Canada: Third Eye Capital Corporation v. Dianor Resources Inc. Evan Cobb

Insolvency proceedings are often used by debtors to sell assets, or issue in Third Eye Capital Corporation entire going concern businesses, “free and clear” of encumbrances v. Dianor Resources Inc. The Court of in an efficient and expedited manner to maximize recoveries for Appeal’s decision provides a framework within which parties including debtors, both secured and unsecured creditors. secured lenders and purchasers may consider the appropriate scope of an In Canada, similar to other jurisdictions, controversy. The then approval and vesting order that can be these sales will generally be entered into effectively attaches to the proceeds applied to a broad range of interests. on an ‘as is, where is’ basis, supported of the sale. On the other end of the by an ‘approval and vesting order’ spectrum would be a third-party’s clear directing that the transfer will be free ownership interest, such as fee simple Facts and clear of encumbrances. Those ownership interest in land, which an encumbrances are then preserved, in approval and vesting order in Canada Dianor Resources Inc. (“Dianor”) was an accordance with their relative priorities, generally will not extinguish. In other insolvent exploration company focused as against the proceeds from the sale words, an approval and vesting order on the acquisition and exploitation of transaction. cannot grant a debtor company the mining properties in Canada. Dianor’s right to sell a third party’s property for secured lender, Third Eye Capital The breadth of interests that can be the benefit of the debtor company’s Corporation (the “Lender”) successfully extinguished or ‘vested out’ through an creditors. applied for the appointment of a receiver approval and vesting order has been the over Dianor’s assets, including its subject of some uncertainty in Canadian Between these two ends of the spectrum flagship project in Ontario. The project insolvencies. Purchasers and sellers are the more difficult cases in the was the subject of royalty agreements will of course want these orders to be so-called grey area of the law, such as in favour of two parties and notices of drafted and interpreted very broadly. mining royalty interests that may be these agreements were registered on Holders of interests in the property characterized as an interest in land title to the project. The royalties were being sold may have an incentive in rather than a financial interest. The not generating cash flow for the royalty certain circumstances to argue that their treatment of these types of interests holders at the time of the . specific interest cannot be extinguished under approval and vesting orders or vested out and must follow the asset. in Canada has been inconsistent, The lower court approved a sale process which creates some uncertainty in the that generated two bids for the project. This is not an easy issue to resolve. On distressed M&A market. The winning bid from the Lender was one end of the spectrum are financial a credit bid worth C$2 million, plus claims, such as security interests, But recently, the Ontario Court of Appeal the assumption of certain liabilities. that are regularly vested out without has sought to add some clarity to this The purchase was conditional upon

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the extinguishment of the royalty The Dianor Resources Inc. decision certainly will be interests for which the Lender would pay C$400,000 in aggregate. The welcomed by holders of mining and other resource royalty interests were to be extinguished pursuant to an approval and vesting royalties for the additional clarity it provides for the order. protection of their rights in an insolvency scenario. The sale was approved by the Ontario court and an approval and vesting order was granted transferring Dianor’s third-party fee simple interests or in a continuing and inherent feature of interest in the project to the purchaser an easement in active use generally the property itself. This, in absence of free and clear of, among other things, should not be extinguished through any agreement by the royalty holder to the royalties. The transaction closed an approval and vesting order. On the or extinguishment shortly thereafter. the other hand, security interests of its interest, was determinative. securing loan obligations, are and can Therefore, the royalty rights should not One of the royalty holders appealed the be regularly extinguished through an have been extinguished by the approval approval and vesting order, though it approval and vesting order. The key and vesting order. did not move for a stay of the approval inquiry is whether the interest is more and vesting order prior to the closing akin to a fixed monetary interest that is Due to procedural issues related to the of the transaction and its appeal attached to real or personal property or appeal in this case, the approval and was commenced after the applicable whether the interest is more akin to a vesting order from which the royalty statutory appeal period expired. Despite fee simple interest that is in substance holder appealed was not reversed. the procedural and mootness issues, an ownership interest that is tied to the However, the court’s substantive the Ontario Court of Appeal nonetheless inherent characteristics of the property analysis will remain relevant for future went on to consider and provide an itself and that is of a continuing nature. cases. opinion on the substantive matters at issue in the appeal. Second, the court should consider whether the parties have consented to Practical implications the vesting out of the interest either at Decision the time of the sale before the court, or The Dianor Resources Inc. decision through prior agreement. certainly will be welcomed by holders The Court of Appeal was asked to of mining and other resource royalties consider whether the royalty interests in Third, if the above factors are for the additional clarity it provides the applicable project in this case could inconclusive, the court may then for the protection of their rights in an and should be extinguished pursuant to engage in a consideration of the insolvency scenario. an approval and vesting order. equities as between the parties to determine if an approval and vesting The decision will also be very important The court concluded that it had order is appropriate in the particular to financial institutions and other jurisdiction to extinguish or vest out circumstances of the case. This would parties who may provide secured interests in land. However, when include consideration of the relative financing to mining and other resource considering whether that jurisdiction prejudice to the interested parties projects. In a default scenario, these should be exercised, the court and whether that prejudice could be lenders may need to rely on an approval concluded that a rigorous ‘cascade adequately compensated for through a and vesting order to monetize collateral analysis’ should be adopted. monetary payment. for maximum proceeds. Secured lenders should diligently review any royalty First, the court should assess the Applying these considerations, the or other interests that may affect the nature and strength of the interest Court of Appeal found that the royalty projects that are financed, as those that is proposed to be extinguished. interests in this case did not simply lenders may not be able to simply rely Not all interests in land share the secure a fixed finite monetary obligation, upon an approval and vesting order same characteristics. For example, rather they were in substance an interest to resolve these adverse interests in

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the future. Lenders would also be advised to seek to negotiate contractual arrangements with royalty holders or other interest holders at the outset of the loan to ensure that the parties’ respective interests are clearly agreed in advance of any potential future sale that may be required as part of an enforcement or insolvency sale process.

In cases where secured loans and royalty interests already co-exist on a particular mining or resource project, the decision in Dianor Resources Inc. will add clarity to the relative rights and negotiating positions of the parties in the case of any eventual insolvency related to the project.

The decision in Dianor Resources, Inc. provides clear support for the proposition that, in the circumstances of that case, a vesting order may not properly extinguish or vest out mining royalty interests and other similar interests in land. The analysis theoretically could apply to many other types of interests as well. That said, whether and the extent to which the Dianor Resources Inc. decision is applied in all jurisdictions in Canada or to interests other than royalty interests in land, such as purchase options, royalties on personal property, and stream interests, remains to be seen.

Evan Cobb is a partner in our Toronto office in the firm’s financial restructuring and insolvency group.

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18 NortonNorton RoseRose FulbrightFulbright –– FallFall 20192019 Norton Rose Fulbright – Fall 2019 19 International Restructuring Newswire Australia

The brewing controversy in Australia surrounding the application of the s 553C set-off defence to unfair preference claims Daniel Vizor and Sarah Gard

The most basic feature of insolvency law is the rule. It Unfair preference claims are one of a holds that in the liquidation of an insolvent company, creditors ’s most effective means of of the same rank are treated equally, with each paid rateably. increasing the pool of assets available in However, the rule is not absolute. Among the exceptions to the pari a liquidation for the benefit of unsecured creditors. Under s 588FA of the Act, passu rule in Australia is insolvency set-off, as provided for under unfair preferences arise where: s 553C of the Corporations Act 2001 (Cth) (the “Act”). 1. the company and a creditor are The interplay between insolvency context of unfair preference claims that parties to a transaction; and set-off provisions and a liquidator’s differs from the current approach and unfair preference claims has become is more favourable to liquidators. We 2. the transaction results in the creditor more controversial in recent years. In discuss the historical creditor-friendly receiving more from the company, in Australia the courts historically have case law in Australia, the recent cases respect of an unsecured debt owing favoured creditors’ rights to rely upon questioning that approach, and conclude to the creditor by the company, than insolvency set-off in order to avoid by identifying two of the more persuasive they would have if the transaction entirely or reduce their liability for unfair arguments that may be relied on by were set aside and the creditor had to preference claims under s 588FA of the courts to change the creditor-friendly prove for the debt in the company’s Act. To date, the weight of authority on approach. liquidation. this issue clearly favours creditors. This is unlike other jurisdictions, such as the For an unfair preference to qualify as a United Kingdom and the United States, Framework of the Act voidable transaction, under s 588FC, which prevent or limit a creditor’s right the transaction must have been entered to set-off against a preference claim in an Subject to the qualification set out in into within six months of the ‘relation- insolvency case. s 553C(2) of the Act, s 553C provides for back day’, and at a time when the the mandatory set-off of mutual credits, company was insolvent, or become The creditor-friendly law in Australia mutual debits or other mutual dealings insolvent because of entering into that cannot yet be regarded as settled. The between an insolvent company and a transaction. The remedies available in two most recent cases in Australia are person making a claim in the winding relation to voidable transactions include, notable for suggesting that there are up of that company. Section 553C(2) of under s 588FF(1)(a) of the Act court “powerful contrary arguments” to the the Act prohibits anyone from claiming orders directing the creditor to repay to Australian courts’ current creditor- insolvency set-off where, at the time the company some or all of the money friendly approach. Consequently, credit is given to, or received from, the received under the transaction. the courts may come to a view on the company, they had notice of a company’s availability of insolvency set-off in the insolvency.

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Re Parker of the Act prevented the creditor decided. The liquidators argued this was from setting-off against any unfair because: Although not an unfair preference case, preference liability, the amounts we start our analysis with Re Parker owed to it by the company. 1. allowing set-off in the context of (1997) 80 FCR 1. The case concerned unfair preference claims would the operation of insolvency set-off in The Court held that the first of these lead “to the peculiar result that a the context of insolvent trading claims arguments was inconsistent with Re creditor who is paid [its] entire debt brought against a holding company by Parker. This meant that if the Court was by preference payments will be the liquidators of its subsidiary under to accept the liquidator’s argument, it disadvantaged as compared [with] a ss 588V and 588W of the Act. would necessarily be departing from creditor who is paid only part of [its] Re Parker. Citing Farah Constructions Pty debt by preference payments” (at The holding company argued it was Ltd v Say-Dee Pty Ltd (2007) 230 CLR [233]); and entitled to set-off pre-liquidation debts 89 at 151[135]), the Court considered it due and owing to it by its subsidiary, could only take this step if Re Parker was 2. to allow creditors to “happily accept against any liability arising from ‘plainly wrong’. (As to whether this is preferential payments knowing insolvent trading. In determining that the correct approach, there is conflicting that those payments will be treated the holding company was so entitled, authority. See, for example, the Walker as 100c in the $ for the purposes the Court held (at [10]) that “the two Corporation Pty Ltd v Sydney Harbour of a set-off for the balance of the debts are between the same companies. Foreshore Authority (2008) 233 CLR outstanding amounts” is ‘perverse’ The burden of them would lie in 259 which applied Marshall v Director- (at [244]). the same interests… [and] [t]hey are General, Department of Transport (2001) commensurable, in that they both sound 205 CLR 603 at 632-633 [62].) Unable to The Court rejected the first of these in money”. reach this conclusion, the Court rejected arguments, holding that there was the first argument. nothing peculiar about the outcome described. It was instead, “the plain Morton v Rexel As to the second argument, subject to effect of the legislative provisions and one exception, the Court found at the the legislative policy”. In other words, The liquidator in Morton & Anor v Rexel time the company incurred liability for it was precisely the result that could Electrical Supplies Pty Ltd [2015] QDC the amounts it owed to the creditor, the be expected from a straight-forward 49 sought to recover unfair preference creditor had actual notice of facts that application of the relevant provisions of payments made to the creditor totalling would have indicated to a reasonable the Act. approximately A$200,000. Relying upon person in the creditor’s position, that the Re Parker, the creditor sought to set-off company was insolvent. Consequently, The Court also rejected the second of the against this liability, a A$90,000 debt the Court held that apart from the liquidators’ arguments. Unless a creditor owed to it by the company for goods creditor’s January invoice (in respect is aware that a company is insolvent supplied and delivered. of which the creditor was entitled to at the time payments are made, there a set off), the creditor was otherwise is nothing perverse about the creditor The liquidator argued that: prohibited from setting-off any other accepting them. Further, any perversity amounts owed to it by the company which might otherwise arise from 1. permitting a creditor to set-off debts under s 553C(2). accepting payments with knowledge of which the company owed it, against a company’s insolvency, is already dealt any liability for unfair preference with by s 553C(2) of the Act. claims, would frustrate the purposes Hussain v CSR Building of Part 5.7B of the Act; and Products Limited Despite rejecting the grounds upon which the liquidators relied in arguing 2. at the time the company incurred In Hussain v CSR Building Products the above cases were wrongly decided, liability for the amounts it owed to Limited, in the matter of FPJ Group the Court went on to express the view the creditor, the creditor had notice of Pty Ltd (in liq) [2016] FCA 392, the that there are (at [235]): facts indicating that the company was liquidators submitted that the cases insolvent. Consequently, s 553C(2) referred to above had been wrongly

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“powerful contrary arguments unfair preference payments totalling Despite this, on the basis that the that might have been made approximately A$310,000, while the creditor was found to have had actual [by the liquidators in this case] creditor sought to set-off against this, notice of facts revealing that the to suggest that a set-off is not an A$80,000 debt owed to it by the company was insolvent, the Court held available against a liquidator’s company. that the creditor could not avail itself of claim to recover preference s 553C of the Act. It was relevant to this payments.” The liquidators accepted that the balance that the company had made multiple of current authority allows creditors to promises to make payment, none of Without identifying what the “powerful rely on insolvency set-off in the context which were met, despite the creditor’s contrary arguments” were, the Court of voidable transaction claims. Despite persistence in continuing to follow held that as a result of the liquidators’ this, the liquidators “made a formal payment up. failure to raise them, it would be submission” that insolvency set-off is not inappropriate for the Court to assess available in relation to preference claims. those arguments. There was also no They urged the Court not to follow the The position in the UK and utility in doing so, given the Court’s cases referred to above, which they the US finding that there was insufficient considered were “plainly wrong”. evidence to establish that the company Before turning to consider where to from was insolvent at the time of making the The purpose of the liquidators’ formal here for insolvency set-off in the context relevant payments. submission was simply to preserve of unfair preference claims in Australia, their ability to raise the above issues on it is interesting to compare the Australian appeal if necessary. Consequently, the courts’ approach against the approach Stone v Melrose liquidators made no attempt to develop taken in the UK and the US. these arguments in the context of this Stone v Melrose Cranes & Rigging Pty Ltd, first instance proceeding. Without the Rule 4.90 of the Insolvency Rules 1986 Re Cardinal Project Services Pty Ltd (in benefit of detailed submissions to the (UK) provides for insolvency set-off in the liq) (No 2) [2018] FCA 530 is the latest contrary, the Court adopted the approach UK on terms which are very similar to case to be decided on these issues. The taken in Re Parker. s 553C of the Act. Under r 4.90, liquidators in this case sought to recover insolvency set-off applies where, before

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liquidation, there have been, “mutual In the UK, recoveries made from unfair preference claims credits, mutual debts or other mutual dealings between the company and are not considered company property. They are instead any creditor of the company proving or claiming to prove for a debt in treated as having a special status which stems from liquidation”. If there have been such mutual dealings then “account shall the nature and underlying statutory basis for unfair be taken … and the sums due from one party shall be set-off against the preference claims. sums due from the other” and “only the balance (if any) of the account provided by the creditor to the company 2. second, there is a timing issue is provable in the liquidation”. Like after the preference payment at issue relating to when liability arises for Australia, mutuality is essential - sums was received by the creditor. The policy unfair preferences the effect of which due from the company to another party behind the US approach is to incentivise means that, as at the time insolvency will not be included in the set-off. creditors to continue doing business set-off ought to be assessed, there are with distressed companies. However, arguably no mutual credits, mutual Despite the similarities between r 4.90 the timing is critical since unlike in debits or other mutual dealings and s 553C, the courts in the UK have Australia, a debt already in existence at capable of being set-off. taken a very different approach to the the time that a preference payment is application of insolvency set-off in the received cannot be used to offset against The first issue arises because unfair context of unfair preference claims. a preference claim. The debt must preference claims are required to be have been the result of a subsequent brought by liquidators, whereas the In the UK, recoveries made from extension of credit. creditor seeks to set-off against this, unfair preference claims are not amounts owed to it by the company. considered company property. They The Court in Re Parker rejected this are instead treated as having a special Looking forward argument (albeit in the context of an status which stems from the nature insolvent trading claim) having regard and underlying statutory basis for By noting that there are “powerful to s 588FF of the Act. This enables unfair preference claims. Relevant to contrary arguments” to the courts’ orders to be made directing creditors this, unfair preference claims must current creditor-friendly approach, to pay unfair preference amounts “to be brought by liquidators (not the Hussain v CSR Building Products the company” (at p 11). On this basis, company), for the benefit of unsecured and Stone v Melrose suggest that the Court in Re Parker downplayed the creditors, among whom liquidators insolvency set-off could yet be held to ‘procedural’ role played by liquidators must distribute any recovery made (see be unavailable in the context of unfair in bringing insolvent trading claims Re Oasis Merchandising Services Ltd preference claims. Of the various which were, “as a matter of substance”, [1998] Ch 170 at 181-183 and Lewis v arguments in favour of such a view, company claims (at p 11). Commissioner of Inland Revenue [2001] those identified below relating to 3 All ER 499 at [36]-[37]). For this mutuality are likely to be among the Even if this analysis is accepted, reason, insolvency set-off is not available more persuasive. however, it is not a sufficient basis upon in the context of unfair preferences in which to establish mutuality. As Rory the UK. A lack of mutuality between a creditor’s Derham points out in relation to unfair liability for unfair preferences and any preference claims (see Derham R, Set-off In the US, the US Bankruptcy Code amounts owing to the creditor by the against statutory avoidance and insolvent limits a creditor’s ability to set-off a debt company may be said to arise in one of trading claims in company liquidation, against a trustee’s preference claim. two ways: 89 ALJ 459 at 475), this is because the Under s 547(c)(4) of the US Bankruptcy company is not the beneficial owner of Code, a preference defendant may only 1. first, there is arguably a disconnect such claims. It follows from this that the seek to set-off debts for “new value” in between the parties against whom the company cannot charge or assign such the form of “money or money’s worth above claims may be brought; and/or claims prior to it being wound-up, and in goods, services or new credit” that is any recovery made from such claims

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cannot be accessed by the company this principle should apply both to the Australian Stock Exchange Ltd (2005) for its own purposes, but must instead creditor’s claim against the company and 144 FCR 327 at [9]). be distributed by the liquidator for the to the unfair preference claims against benefit of unsecured creditors. the creditor. This cannot easily be applied to unfair preference claims. Among other things, There is a strong argument for saying The principle that insolvency set-off payments made may only be recovered that, absent beneficial ownership in any must be assessed having regard to as unfair preferences where a company is unfair preference claims by the company, circumstances in existence before the being wound-up and a court is satisfied there is a lack of mutuality between relevant date, creates obvious difficulty that the payments are voidable in such claims and any amounts owing to in the case of unfair preference claims. accordance with 588FE. Only then may the creditor by the company. In those Before an unfair preference claim may a court make one or more of the orders circumstances, insolvency set-off should be brought, the company must first have set out in s 588FF of the Act. It is difficult not be available to creditors in defence of been wound-up. However, in the case to reconcile the language and scheme unfair preference claims. of a company that is wound-up without of these provisions with an obligation first being put into , the which could be said to exist before a In relation to the timing issue identified winding-up necessarily commences winding-up. above, Re Parker held (at p 15) that the on the relevant date, not before it. This date for assessing whether insolvency would appear to rule out the availability For these reasons, we consider that set-off should be allowed ought to be of insolvency set-off. a court could yet determine that the same as the date fixed under s 553 insolvency set-off is not available to of the Act for determining what debts Against this, it has been suggested that creditors in defence of unfair preference are provable. insolvency set-off may still be available claims. This would upend current in relation to liquidator claims on the Australian law, but at the same time Section 553 establishes that to basis that these constitute contingent bring it closer in line to other similar be provable in a winding-up, the liabilities (Re Parker at p 11-12). This jurisdictions such as the UK and the US. circumstances giving rise to a claim appears contrary, however, to the must have occurred before the ‘relevant generally accepted view as to when date’. (Unless a company enters into contingent liabilities arise. In order to Daniel Vizor is a senior associate in our administration prior to being wound- constitute a contingent liability, there Melbourne office in the firm’s financial restructuring and insolvency group. up, the ‘relevant date’ will be the day a must be an existing obligation out of Sarah Gard is a graduate in our winding up order is made, or a resolution which, on the happening of a future Melbourne office. winding the company up is passed.) event, an obligation to pay a sum of For the purposes of insolvency set-off, money would arise (see McLellan v

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