October 28, 2015
Post-Filing Interest No More: The Court of Appeal’s recent decision from Nortel Networks Corporation
On October 13, 2015, the Ontario Court of Appeal released
its decision in Re Nortel Networks
the application of the common law “interest stops rule” in insolvency proceedings
under the Companies’ Creditors
Arrangement Act (“CCAA”).
The appeal was brought by the Ad Hoc Group of Bondholders
(the “Bondholders”) which held
claims against certain of the Canadian Nortel entities that were the issuer or
guarantor of the bonds. The Bondholders
appealed the decision of the Honourable Justice Newbould
that the common law “interest stops rule” applies in a CCAA proceeding, thereby
preventing the Bondholders from accruing post-filing interest on their claims
filed in the Nortel CCAA proceeding.
The Ontario Court of Appeal denied the appeal of the
Bondholders and upheld the decision of Justice Newbould. The Court of Appeal found that there were
sound legal and policy reasons for applying the interest stops rule in the CCAA
context. Further, the Court of Appeal found that the
decisions in Re Stelco and Re Canada 3000 that were relied on by
the Bondholders did not preclude the application of the interest stops rule.
On January 14, 2009, Nortel’s Canadian restructuring
proceedings were commenced under the CCAA.
Concurrent with the Canadian filing, Nortel’s international entities
commenced proceedings in the United States and in the United Kingdom for its
Europe, Middle East and Africa entities.
In the Initial Order granted in the Canadian CCAA proceedings, the
Canadian Debtors were
directed, subject to certain exceptions, to make no payments of principal or
interest on account of amounts owing by the Canadian Debtors to any of their
creditors as of the filing date, unless approved by the Monitor. Further, all proceedings and enforcement
processes, and all rights and remedies of any person against the Canadian
Debtors were stayed absent consent of the Canadian Debtors and the Monitor, or
leave of the Court.
As part of the claims procedure in the CCAA proceeding, the
Bondholders filed proofs of claim that included the principal amount of the
debt, interest that accrued to the date of the insolvency filing and
contractual interest and other post-filing amounts accruing after the date of
On June 24, 2014, Justice Newbould released a decision that
the common law “interest stops rule” applied in the CCAA and, as such, the
Bondholders were not entitled to post-filing interest on their claims in the
Nortel CCAA proceeding. The Bondholders
appealed this decision, which appeal was heard on April 29, 2015.
Issues on Appeal
There were two related issues raised by the Bondholders on
1. whether the CCAA judge erred in concluding that an
interest stops rule applies in CCAA proceedings; and
2. if not, whether he erred in concluding that the Bondholders
are not legally entitled to claim or receive any amounts under the relevant indentures
above and beyond the outstanding principal debt and pre-filing interest.
In upholding Justice Newbould’s decision, the Court of
Appeal reviewed the origin and scope of the interest stops rule. The Court of Appeal found that it is well
settled that the pari passu principle
applies in insolvency proceedings. The pari
passu principle has been said to be the foremost principle in the law of
insolvency not just in Canada, but around the world. It is this principle that creates the
requirement to treat all unsecured creditors fairly and ensures an orderly
distribution of the assets of a bankrupt company. In finding the pari passu rule applies, the Court found the necessary corollary
was the interest stops rule. Absent the
interest stops rule, the fairness and orderly distribution sought by the pari passu rule could not be achieved. The court found that to allow some creditors
to accrue interest as a result of contractual provisions, while other
creditors’ claims do not include such a right, would create prejudice for those
parties who are not able to accrue interest as a result of the commencement of
the proceedings, which the court referred to as “accidental delay”. The underlying purposes for the interest
stops rule is fairness to creditors and to achieve an orderly administration.
Following its review of the origin and scope of the
principles, the Court of Appeal examined if the interest stops rule should
apply in CCAA proceedings. The court
found that while there are differences between the CCAA and the other Canadian
insolvency schemes, the
“principles that underpin the conclusion that the interest stops rule is
necessary in bankruptcy and winding-up proceedings – namely, the fair treatment
of creditors and the orderly administration of an insolvent debtor’s estate -
apply with equal force to CCAA proceedings.” In making this finding the Court of Appeal reviewed
the various factors it considered.
First, the Court of Appeal commented that the CCAA is part
of an integrated insolvency regime, including the Bankruptcy and Insolvency Act (Canada) (the “BIA”) and the Winding Up and
Restructuring Act. The court found
that the application of the interest stops rule was consistent with the
position set out by the Supreme Court of Canada in Century Services
that the BIA and the CCAA should be interpreted in a harmonious manner. The court commented that the interest stops
rule should apply in the CCAA, unless the rule is expressly ousted by the CCAA. The Court of Appeal went on to find that the
CCAA does not address entitlement to claim post-filing interest let alone oust
the common law rule with clear wording.
Second, the Court of Appeal found that if the interest stops
rule did not apply in the CCAA, the creditors who did not have a contractual
right to post-filing interest would have “skewed incentives against
reorganizing under the CCAA” and this would “only undermine that statute’s
remedial objectives and risk inviting the very social ills that it was enacted
to avert.” This same position was adopted in Re Indalex, where the Supreme Court of
Canada further commented that to “avoid a race to liquidation under the BIA,
courts will favour an interpretation of the CCAA that affords creditors
analogous entitlements” to those that they would receive under the BIA. Without the interest stops rule under the
CCAA, the creditors with no claim to post-filing interest would have an
incentive to proceed under the BIA as opposed to allowing a company to
restructure under the CCAA.
Third, the Court of Appeal found the interest stops rule is
consistent with maintaining the status
quo while the company attempts to restructure under the CCAA.
Fourth, the Court of Appeal found “if the interest stops
rule were not to apply in CCAA proceedings, the key objective of that statute –
to facilitate the restructuring of corporations through flexibility and
creativity – may be undermined” as a result of the asymmetrical entitlement to
interest. In short, creditors who have an entitlement
to interest may be less motivated to compromise than those who have no
Fifth, the Court of Appeal found that the principle of
fairness supports the application of the interest stops rule. In Nortel, the delay in liquidating the
assets allowed for significant recoveries to be made and the Court of Appeal
found that that benefit should be for all creditors equally, not disproportionately
to those who continued to accrue post-filing interest.
Finally, the appellant raised concerns that as a result of
past practices, the Bondholders had a reasonable expectation to receive
post-filing interest. The Court of
Appeal responded by finding that the interest stops rule is not contrary to
established CCAA practices nor would it prevent a Plan of Arrangement (in which
all creditors would have a statutory right to vote) from providing for
post-filing interest. The Court of Appeal did not accept the
appellant’s submission that the application of the “interest stops rule” would
be a disincentive to participating in CCAA proceedings. Further, the Court of Appeal could not accept
the concern that a debtor company could obtain a permanent interest holiday
resulting in unfairness given the oversight of CCAA judges in administration of
As a result of the foregoing factors, the Court of Appeal found
that there are sound reasons for adopting an interest stops rule in CCAA
proceedings. The Court of Appeal then
went on to review the facts and decisions from the SCC’s decision in Re Canada 3000
and the Ontario Court of Appeal’s decision in Re Stelco.
In Re Canada 3000,
the Supreme Court of Canada (the “SCC”)
made the comment “[w]hile a CCAA filing does not stop the accrual of
interest...” in relation to interest accruing under certain aviation acts. In the Nortel
decision, the Court of Appeal reviewed this comment and found it to be of
limited application, dealing only with interest accruing under the specific
aviation acts in that case. Further, the Ontario Court of Appeal found
that the SCC was not deciding whether, absent the rights under the aviation
acts, the interest would have accrued or been stopped by the common law
interest stops rule. As a result, the Court of Appeal concluded
that the SCC comment did not preclude the application of the interest stops
rule in CCAA proceedings.
In Re Stelco, the
Ontario Court of Appeal was called upon to decide an inter-creditor dispute
between the senior debenture holders (the “Seniors”)
and the junior note holders (the “Juniors”)
of Stelco Inc. (“Stelco”). At the time of its filing for protection
under the CCAA, Stelco had two principal debt obligations: (i) debts owing to
the Seniors pursuant to senior debentures, and (ii) debts owing to the Juniors
pursuant to junior notes. Pursuant to
the note indenture governing the Juniors, the Juniors agreed to subordinate
their entitlement to repayment until the Seniors were repaid in full (the “Turnover Provisions”). Disputes arose between the Juniors and
Seniors as a result of the Plan of Arrangement of Stelco (the “Plan”).
The Plan provided for payments to both the Seniors and the Juniors,
however, the claims of Stelco’s creditors were limited to amounts in existence
on the filing date. As a result, the
Seniors were only able to claim interest to the date of filing against Stelco. The Seniors claimed the accrued post-filing
interest against the Juniors, amongst other things, pursuant to the Turnover
Provisions. The Ontario Court of Appeal
in Re Stelco ultimately found that
the Plan did not extinguish the rights as between the Seniors and the Juniors
nor did it extinguish the accrual of post-filing interest by the Seniors.
In Nortel, the
Court of Appeal examined the comments from Re
Stelco and found that the Court in that case was dealing with rights
between two creditors, rather than making broad statements about CCAA
proceedings generally. The Court of Appeal in Nortel found that the interest stops rule relates to claims by
creditors against the debtor but does not deal with arrangements as between
creditors.  The ability for one creditor to recover
interest from another creditor does not affect the application of the interest
stops rule in a CCAA proceeding. The Court of Appeal found the other comments
made in Re Stelco with respect to the
interest stops rule to be obiter and
not binding on its current decision.
In light of its analysis, the Court of Appeal found that
these two decisions did not preclude the application of the interest stops rule
in CCAA proceedings. As such, the Court
of Appeal upheld the decision of Justice Newbould that the Bondholders could
not claim or receive post-filing interest at this time and dismissed the appeal
by the Bondholders.
This decision is just another step in the ongoing litigation
in the Nortel restructuring. With each
decision in this proceeding, the creditors of the various Nortel entities get
closer to receiving a potential distribution of the proceeds of the sale of the
global Nortel enterprise.
It will be interesting to see the scope for the application
of this decision in future cases. While
the decision leaves open the ability for unsecured creditors to receive
post-filing interest as part of a Plan of Arrangement in a CCAA proceeding,
this decision will certainly have implications for unsecured creditors in the
If you would like to discuss the potential implications of
this decision in any particular situation, please do not hesitate to contact
any member of TGF’s restructuring team: www.tgf.ca/restructuring .
 Re Nortel Networks Corporation, 2015 ONCA 681 (“ONCA Decision”).
 R.S.C. 1985, c. C-36.
 Re Nortel Networks Corporation, 2014 ONSC 4777.
Decision at para. 8.
 In Canada, five Nortel entities
filed for creditor protection under the CCAA.
Decision at para. 9.
 This includes the scheme in the Bankruptcy and Insolvency Act, R.S.C.
1985, c. B-3 (the “BIA”), as amended
and the Winding-up and Restructuring Act,
R.S.C. 1985, c. W-11 (the “WURA”).
Devision at para. 34.
 Century Services Inc. v. Canada (Attorney
General), 2010 SCC 60.
 Ibid., at para. 35-36.
 Ibid., at para. 37 where the court
adopts the explanation from the Supreme Court of Canada in Century Services.
 Ibid., at para. 39-40.
 Re Canada 3000,
2006 SCC 24.
 Re Stelco,
2007 ONCA 483.
 The Civil Air Navigation Services Commercialization Act, S.C. 1996, c.
20 and the Airport Transfer
(Miscellaneous Matters) Act, S.C. 1992, c. 5.
Decision at at para. 69.
 Re Stelco at para. 45.
 Re. Stelco
at para. 63.
Decision at para. 82.