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March 22, 2010

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Law Times • march 22, 2010 An online resource 1.800.263.3269 Focus On CORPORATE RESTRUCTURING & INSOLVENCY Insolvency update: licensee protection, cross-border filings, CCAA liquidations BY JULIUS MELNITZER For Law Times LICENSEE PROTECTION Th e September 2009 amend- ments to the Companies' Creditors Arrangement Act and the Bankruptcy and In- solvency Act gave intellectual property licensees some of the protection they had long been seeking. Th e changes, however, apply only to CCAA restruc- turings and BIA proposals and not to conventional bankrupt- cies and receiverships. Before the amendments, re- structuring proceedings in which courts routinely voided existing contracts of insolvent companies could wipe out licensees' right to use their licensed property. Th e amendments preserve their right to do so for the duration of the licence agreement, including any renewal. Th e amendments do not, however, defi ne intellectual property. "But I expect that the courts will approach the term liberally, perhaps including property that doesn't fall within the tradition- al categories of IP," says Michael MacNaughton of Borden Lad- ner Gervais LLP. Th e amendments also require licensees to continue perform- ing their "obligations under the agreement in relation to the use of the intellectual property." But complications can arise when the agreement requires the li- censor to provide maintenance, support, and updates. "Th ere's no formula for separating out these compo- nents and deciding how much the licensee has to pay if the li- censor isn't able to meet all its obligations in the event of an insolvency," says Mario Forte of Ogilvy Renault LLP. "Most likely, the parties will have to resolve this by negotiation." Still, inequities may arise, as in cases where the licensee has paid the fees up front. But Forte says future licence agreements will take the amend- ments into account. "Licences will bundle rights into compo- nents whose aggregate will like- ly approximate an all-in licence fee, but the compartmentaliza- tion will make it easier to dis- sect the contract if a party is not able to fulfi l all its obligations," he says. Meanwhile, uncertainty hov- ers. "At fi rst blush, one might be inclined to say that the amend- ments are so vague, they could give rise to a real mess," Forte says. "But I believe that they provide a reasonable framework within which courts can apply their reasonable judgment, and our courts have been good at doing that." NEW TRENDS IN CROSS- BORDER INSOLVENCIES Th e traditional way of dealing with cross-border restructurings of related Canadian and U.S. corporate entities envisages a scenario where Canadian mem- bers of the group fi le here and seek recognition down there with U.S. companies doing the same in their own country. "It's a familiar procedure that involves a cross-border proto- col, joint hearings, and Canadi- an and U.S. judges dealing with separate groups of companies to whom they apply their own law while co-ordinating the two systems," says Kevin McElcher- an of McCarthy Tétrault LLP. "But what you see now is a developing trend where all the related companies fi le in either Canada or the U.S., depending on which jurisdiction is more convenient." Generally speaking, fi ling in Canada is a better choice for smaller companies because CCAA proceedings are less complex and less expensive than Chapter 15 fi lings under the U.S. bankruptcy rules. But the procedure is relatively untested and has some risks, the most signifi cant of which is obtaining a free and clear vesting order re- garding U.S. assets at the end of the process. "It's not clear whether Ameri- to reviewable transactions, such as fraudulent conveyances and preferences," McElcheran says. "Insolvency law, after all, does embrace an element of commer- cial morality to which some de- gree of locality attaches." While CCAA amendments don't define intellectual property, Kevin McElcheran expects the courts will interpret the term liberally. can judges can grant such orders under the Chapter 15 recogni- tion process or whether resort to Chapter 11 is necessary," McElcheran says. "My view is that judges do have that power, and I say that because they've been recognizing debtor-in- fi nancing priority orders under Chapter 15, so there would ap- pear to be no reason in principle to refuse a vesting order." Th e most obvious reason for fi ling only in the United States is that most or all of the assets are south of the border. "Th e insolvency of Lear [Corp.], an auto seating man- ufacturer, is a case in point," McElcheran says. "Th e com- pany's centre of interest is the U.S., and the fi nancing is pri- marily public debt and secured fi nancing from U.S. sources." But the procedure may be unfair to Canadian suppliers. "You've got to ask whether it's right to force an Ontario supplier to deal with a Delaware court if a claim is disputed," McElcheran says. Filing in one jurisdiction can also be a problem where sub- stantive insolvency diff ers. "Th at happens most often in areas touching social policy like labour law, the treatment of col- lective agreements and the prior- ity of wages, and also with regard CCAA LIQUIDATIONS For some time now, the use of the CCAA to sell all or substan- tially all of the assets of a dis- tressed business in the absence of a plan or proposed plan of arrangement has been a matter of controversy. Th e issue peaked in the 2008 case of Cliff s Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., when the B.C. Court of Appeal refused a CCAA stay order to an in- solvent real estate development because "the debtor company does not intend to propose a compromise or arrangement" to its creditors. "But in Ontario, liquidations have been an increasing focus of CCAA proceedings," says Tony DeMarinis of Torys LLP. "Th e Nortel case involved separate auctions for the company's key divisions, the GM restructuring was organized as a sale, and oth- er CCAA auctions took place in proceedings like SkyPower Corp. and Grant Forest Products." Th e Nortel Networks pro- ceeding is particularly impor- tant because Justice Geoff rey Morawetz of the Ontario Su- perior Court of Justice took the opportunity to consider the court's power to approve sub- stantial asset sales in the absence of a restructuring plan. He noted such sales had oc- curred previously under the CCAA, citing the insolvencies of Stelco Inc., the Canadian Red Cross, and Consumers Packag- ing Inc. He distinguished Cliff s Over Maple Bay by pointing out that the assets, composed of a real estate development, didn't include an operating business. "Morawetz reinforced the view that the CCAA is fl exible legislation to which the courts must give a liberal interpreta- tion and that the overreaching purpose of the CCAA is to pre- serve a business as a going con- cern without regard to a change in the ownership of the busi- ness," DeMarinis says. Morawetz cited several guid- ing principles for the exercise of the court's discretion, including whether the transaction would benefi t the whole economic community. "Th is perpetuates the view that courts in restructuring pro- ceedings will consider the inter- ests not only of creditors but of other interested parties, particu- larly employees and the commu- nity at large," DeMarinis says. Despite the fact that recent amendments to the CCAA now specifi cally authorize assets sales, Nortel remains an important precedent because the amend- ments don't speak to the neces- sity for a restructuring plan in a proposed CCAA liquidation. CCAA AMENDMENTS Th e last of the unproclaimed amendments to Canada's insol- vency laws came into force on Sept. 18. While many of these amendments deal with consumer and personal bankruptcies, they also codify important aspects of CCAA jurisprudence that have developed over the years. In addition to authorizing liquidations, the CCAA amend- ments grant statutory authority to courts to authorize debtor- in-possession funding security and provide guidelines as to when the discretion should be exercised. As well, the amendments re- solve a judicial divide between Ontario and B.C. courts over the test for ordering the repu- diation of a contract. "Ontario courts had adopted a more liberal test that asked whether the repudiation would advance the viability of the re- structuring, while B.C. had a higher threshold asking wheth- er the repudiation was neces- sary to the advancement of the restructuring," DeMarinis says. "Th e amendments lean toward the Ontario approach." LT WHICH DIRECTION IS BEST FOR YOU? RainMaker Group 110 Yonge Street, Suite 1101 Toronto, Ontario M5C 1T4 Untitled-7 1 Tel: 416-863-9543 Fax: 416-863-9757 www.rainmakergroup.ca www.lawtimesnews.com 5/29/08 1:05:49 PM PAGE 9

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