Thank you for sharing!

Your article was successfully shared with the contacts you provided.

This is a busy season for Canadian insolvency lawyers — or, as they say in American-style English, bankruptcy attorneys. The mushrooming of cross-border restructurings has exposed Canadian lawyers to the U.S. bankruptcy system and, conversely, U.S. attorneys to the Canadian insolvency regimes. Both are similar and share common verbiage. However, there is a danger in assuming that the same words mean the same thing in each system. This point became clear recently to those sitting in a New York courtroom during a motion for recognition of an order from a Canadian court “sanctioning” a Canadian plan of compromise and arrangement, which in American legal parlance would be a plan of reorganization. The presiding judge found it amusing that in Canada the court “sanctions” a plan — i.e., “approves” it. In the United States, a court “sanction” has the exact opposite meaning. This experience points out the potential landmines that can arise when shared terminology is used by two respective legal systems. Here are a few examples of words and phrases that yield highly different meanings in the two jurisdictions. • Administration charge/administrative claim. In Canada, an “administration charge” is a judicially created charge to secure payment of professional fees — usually the lawyers’ and financial advisers’ — to the debtor and a court officer known as the “monitor.” It is a high-ranking charge that typically trumps existing prefiling security and any post-filing debtor-in-possession (DIP) financing charge. An “administrative claim” in the United States is a claim for the post-filing supply of goods and necessary costs of preserving the estate. The priority of an “administrative claim” in a U.S. proceeding is not as high as an “administration charge” in Canada. A bankruptcy attorney asked to agree to an administration charge in a Canadian proceeding should be aware that it may trump more interests than does its U.S. counterpart. • Bankruptcy. In Canada a “bankruptcy” is restricted to a Chapter 7-type liquidation whereby a trustee is appointed to liquidate a debtor’s assets and distribute them in accordance with the priorities. In the United States, “bankruptcy” has a more general connotation and applies to both liquidation and restructuring processes under Chapter 11. In Canada, to describe a company engaged in a restructuring as being in a bankruptcy proceeding is misleading and negative. • Critical supplier. Under new amendments to Canada’s Companies’ Creditors Arrangement Act — equivalent to Chapter 11 — a supplier can be designated as “critical” for its importance in providing a company key goods or services vital to its operation. Payment is secured by a judicially granted “critical supplier charge,” which will rank in priority above existing prefiling secured creditors and, probably, most court-ordered charges. In the United States, the rights and obligations of critical suppliers are different and subject to debate. Being designated a critical supplier in Canada now has a precise meaning and serious legal consequences. • DIP financing. This financing is obtained by a debtor, post-filing, in order to finance its business during a restructuring. The concept started in the United States and was adopted in Canada in the past 20 years. But there is an important difference between DIP financing in the two countries. In Canada, there is no requirement for “adequate protection.” It is possible to obtain a DIP loan that trumps existing financing without giving adequate protection to the existing financing. • Information officer. A practice has arisen in Canadian ancillary proceedings to appoint an information officer of the court. This person reports to the Canadian court and Canadian creditors on the status of the U.S. proceedings and the assets or business in Canada. The role is similar to a “monitor” in a Canadian restructuring. In the United States, an information officer is a communications professional employed by a debtor to serve a public relations function. • Trustee. In Canada a “trustee” is any licensed insolvency practitioner — usually an accounting firm — appointed to administer the affairs of a bankrupt entity. The assets of the bankrupt party vest in the trustee, who liquidates them and distributes the proceeds according to applicable priorities. In the U.S. system, “trustee” is usually an officer of the Justice Department responsible for supervising the administration of bankruptcy proceedings or estates. A trustee can be an individual or a corporation appointed under Chapter 7 to manage liquidation of the estate for the benefit of the creditors. Trustees may also be appointed under Chapter 11 when the court finds that the debtor should no longer have control of its assets. U.S. and Canadian bankruptcy professionals should be sensitive to potential misunderstandings of shared language that, due to different cultural origins and specific legal contexts, reflect different meanings. Watch your P’s and Q’s, and hopefully, you’ll stay on the same page as your cross-border counterparts. Aubrey Kauffman and Stuart Brotman are partners in the insolvency practice of the Toronto office of Fasken Martineau DuMoulin, one of Canada’s largest law firms. They can be reached, respectively, at [email protected] and [email protected].

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.