ONTARIO – Arbitration clause found to be inoperative by virtue of single proceeding model in insolvency proceedings and receiver being a creature of a court order. In an insolvency proceeding parties cannot contract out of the single proceeding model where one party may make claims that will affect all creditors. A single judge of the Court of Appeal denied leave to appeal from a judge’s decision refusing to stay an action in favour of arbitration in the face of a receivership.

Mundo Media Ltd. (Re)
2022 ONCA 607, August 22, 2022
Ontario Court of Appeal (Thorburn J.A. )

On April 9, 2019, Mundo Media Ltd. (“Mundo”) was placed in receivership under s. 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the “BIA”). The Motion Judge, Penny J., held that the receiver’s motion for judgment for $4,124,000 should not be stayed in favour of arbitration on the basis of arbitration agreements contained in the agreements between Mundo and SPay, Mundo’s largest creditor, which required all disputes to be resolved by arbitration in New York pursuant to New York law under the UNCITRAL Model Law.

The issue to be decided by Thorburn J.A., sitting a single judge of the Court of Appeal, was whether SPay should be granted leave to appeal the motion judge’s decision.

Schedule 2, art. 8 of the UNCITRAL Model Law, incorporated into the International Commercial Arbitration Act, 2017, S.O. 2017, c.2 Sch. 5 (“ICCA”) requires the court to refer a matter to arbitration upon a party’s request, unless there are grounds on which the court should refuse the stay such as “the agreement is null and void, inoperative or incapable of being performed.” (para.19)

The motion judge denied the stay application (para.4) on the basis that the arbitration clauses were inoperative because of the insolvency concept of a “single proceeding model” (“Model”). (para.6) The motion judge also found that SPay was not a stranger to the insolvency. (para. 7) Penny J. further held that as the receiver is an officer of the Ontario court and only answers to the Ontario Court, it would be impracticable to have an arbitrator in New York decide whether a receiver appointed in Ontario is bound by an arbitration clause in the context of an insolvency proceeding. (para.23)

The UNCITRAL Model Law favours that litigation relating to an insolvent company be dealt with in a single jurisdiction. Thorburn J.A. referred to Sam Lévy & Associés Inc v Azco Mining Inc. 2001 SCC 92 where the SCC held that a creditor “who cannot claim to be a stranger to the bankruptcy’ has the burden of demonstrating sufficient cause to have the proceedings fragmented across multiple jurisdictions.” (para.6)

Analysis

Single Proceeding Model

The motion judge noted that the Model is not limited to claims against the debtor and can also be applied to claims advanced by the debtor against a third party, if the third party is not a stranger to the bankruptcy. The motion’s judge referred to Re: Essar Steel Algoma Inc .et al. 2016 ONSC 595. ( para. 24)

Further the motion’s judge held that the determining factor in whether a party is a stranger to the proceeding is “the degree of connection of the claim to the insolvency proceedings.”(para.25) SPay was not a stranger to the insolvency proceeding because 1) the receiver sought to realize on a significant asset of the debtor, its largest account receivable; 2) SPay intends to assert its own claim of set-off against Mundo; and 3) nothing turned on whether SPay’s claim was a counterclaim or set-off. (paras 26, 27)

The Leave to Appeal Test

On a motion for leave to appeal pursuant to section 193 of the BIA, the moving party must meet three criteria. Thorburn J.A. referred to the decision of Blair J.A. in Business Development Bank of Canada v Pine Tree Resorts Inc. 2013 ONCA 282.( para.29):

1. The appeal must be “prima facie meritorious”, meaning raising legitimately arguable points like the decision is contrary to the law, is an abuse of judicial power or involves an obvious error causing prejudice for which there is no remedy.(para.30)
2. The proposed appeal must raise an issue or issues of general importance; and (para.31)
3. The proposed appeal must not unduly delay the progress of the proceedings. (para.32)

Thorburn J.A. noted that the assessment is done against the backdrop of s. 243 of the BIA, which gives the supervising judge a broad mandate to resolve issues in the bankruptcy. (para.30). The judge also referred to Third Eye Capital Corporation v Resources Dianor Inc. 2019 ONCA 508 at paras.57-58 where the court confirmed that s.243 of the BIA gives supervising judges a broad mandate to resolve most issues in a bankruptcy case. (para.30)

Thorburn J.A. stated that Commercial List judges with experience in insolvency proceedings are “alive to the legal and business realities faced by debtors, creditors, and the receiver” and therefore substantial deference is owed to their decisions”. The Judge referenced Rompsen Investment Corporation v Courtice Auto Wreckers Limited 2017 ONCA 301 (para.30)

The ONCA held leave should not be granted on the basis that the receiver’s authority emanates from a court order, and as a matter of law, only the Ontario court can determine the receiver’s powers and obligations and whether an arbitration clause prohibits asserting claims against third parties. Further the ICCA provides an express carve out, the court does not have to stay the proceeding if the arbitration clause “inoperative”. Thorburn J.A. held that the express carve out read in conjunction with the broad discretion that court’s exercise pursuant to s. 243 of the BIA enables bankruptcy courts to preclude the operation of the ICCA by virtue of the Model.(para. 37)

Further, Thorburn J.A. agreed with the motion’s judge, SPay was not a stranger to the insolvency proceedings and therefore the Model applied as that the purpose of the Model was to bring efficiency to the insolvency process and maximise the returns for the creditors.(para. 40) The fact that SPay may raise a defence of set off and if successful eliminate the debt owed to the debtor does not change the substantive role of SPay as a significant debtor in the insolvency and therefore not a stranger. (para.51).

Thorburn J. A. held that the jurisprudence does not allow a party to contract out of the Model where one party may make claims that will seriously affect all creditors.(para.53)

This second ground of appeal based upon SPay asserting claims in set-off was also not prima facie meritorious.

Thorburn J.A. held that the issues raised by SPay are about the application of the law to the specific facts of the case and were not matters of general importance and therefore did not meet the second aspect of the test. (para. 56)

Thorburn J.A. held that allowing the appeal to proceed would unduly result in delay and additional cost as the receiver had been trying to collect the SPay accounts receivable since May 2019 and therefore, the third aspect of the test for leave was not me.

Editor’s Comments

1. Canadian arbitration legislation has respected party autonomy to decide how they want to resolve their disputes except in limited circumstances set out in the legislation. This case shows that in the case of an insolvency proceeding with a court appointed receiver party autonomy is not an overriding factor in the consideration as to whether or not a court proceeding should be stayed in favour of arbitration.
2. The case is fact specific and the court indicated that because the powers of the receiver emanated by virtue of and Ontario court order; the broad discretion s. 243 of the BIA gives to a supervising judge in an insolvency proceeding , the Single Proceeding Model and the fact that SPay was the largest debtor in the insolvency and the outcome of the dispute would affect all creditors, circumstances existed to refuse the stay in favour of arbitration in New York.
3. There has been a tension between arbitration and insolvency proceedings of late. We await the Supreme Court’s decision in Petrowest Corporation v Peace River Hydro Partners about whether a court appointed receiver can disclaim an arbitration agreement within a contract and enforce the balance of the contract.