An Encore: annulling the bankruptcy proceedings

Following the conclusion of the EncoreFX Proceedings under the Companies’ Creditors Arrangement Act (“CCAA”), Ernst & Young Inc. (“EY,” initially the “Trustee,” and then the “Monitor”) brought an application on behalf of EncoreFX to annul EncoreFX’s prior assignment in bankruptcy.

On January 10, 2023, the B.C. Supreme Court rendered its decision in EncoreFX Inc. (Re), 2023 BCSC 39, a case involving a B.C.-based foreign exchange service that filed for bankruptcy in March, 2020, and then obtained an initial order under the CCAA on March 30, 2021.

The details of Encore FX’s bankruptcy proceedings

EncoreFX provided foreign exchange risk management services and cross-border payment services to small and medium enterprises. Its services included foreign exchange spot transactions, foreign exchange derivative contracts (including forward contracts and options) and payment processing services.

In March 2020, due to the pandemic, the global foreign exchange markets were unusually volatile, causing EncoreFX’s clients to be subject to margins calls. Clients were unable to pay these margin calls which created short-term liquidity issues for EncoreFX with its own liquidity providers.

On March 26, 2020, EncoreFX engaged EY and MLT Aikins LLP to consider their restructuring options. EncoreFX ultimately determined that all trading needed to be suspended before the markets opened on March 30, 2020 and therefore assigned itself into bankruptcy on March 30, 2020 (“Assignment”).

The administration of EncoreFX’s bankruptcy proceedings proved to be complicated. In early 2021, EY and MLT Aikins determined that a CCAA restructuring proceeding would be a better mechanism to address stakeholder claims because, inter alia, the CCAA provides the flexibility needed to address and resolve complex claims. On March 30, 2021, the Court granted a CCAA initial order. On April 8, 2021, the Court granted orders for, inter alia, the process by which: EncoreFX’s affected creditors would prove their respective claims in the CCAA proceeding, the Monitor would hold the creditors’ meetings, and the affected creditors would vote upon the plan of compromise and arrangement.

On November 2, 2022, EncoreFX’s successful CCAA proceedings concluded and EY, as Monitor, was discharged. The conclusion of the Assignment was not addressed at this time, therefore EY, as Trustee, brought a subsequent application to annul the Assignment ab initio.

A Gap in Insolvency Legislation

While the Bankruptcy and Insolvency Act (“BIA”) provides a clear mechanism for annulling bankruptcy proceedings under s. 61(1) where a bankrupt makes a successful proposal under Part III of the BIA, this provision is not applicable to cases where a bankrupt successfully implements a CCAA plan of arrangement. However, s. 181(1) of the BIA provides jurisdiction to a court to annul an assignment in circumstances where the court concludes that the assignment “ought not to have been filed.” While the courts have the discretion to grant this remedy, they do not do so readily and without heavily considering the specific circumstances of each case.

Annulling a Bankruptcy after a Successful Proposal

In the case of EncoreFX, the Court carefully reviewed case law addressing annulments of assignments made and considered the factors to be weighed by a court in exercising its discretion to find that an assignment “ought not to have been filed.” These include:

  • Why was the bankruptcy proceeding chosen over another proceeding?
  • What are the special circumstances of the case?
  • What would have happened if the opportunity available at a later time had been known by the bankrupt or petitioning creditor at the time the Assignment had been made?
  • What interests are at play, including those of the bankrupt and the creditors?
  • Was there improper conduct by the bankrupt?
  • Will the public interest in the integrity of the bankruptcy process be undermined?
  • Is an annulment in the circumstances consistent with the objective of harmonizing Canada’s insolvency regimes?

The Court found the following factors relevant in coming to the determination that EncoreFX’s  Assignment “ought not to have been made” pursuant to s. 181(1) of the BIA:

  • As a result of the short time frame from when EY was engaged and a decision needed to be made, it was not possible for EncoreFX and the insolvency professionals to contemplate all of the complex issues that later came to light which would have been better served by a CCAA restructuring.
  • EncoreFX did not have the full factual landscape of potentially knowable and critical information, such as there being deficiencies in some secured creditors’ security or that various property claims would be disallowed, at the time that the Assignment was made.
  • The Assignment was the advisable course of action with the information available to EncoreFX and the Trustee at the time. If EncoreFX and EY had the time to fully consider all of the available options at the outset, the Assignment almost certainly would have been avoided.
  • Once the Trustee spent time uncovering more information, it determined that the bankruptcy proceeding was too restrictive and that proceeding under the CCAA would be more appropriate as a CCAA proceeding would, inter alia, grant the Trustee more flexibility to settle and resolve contested claims more simply and allow for greater recovery to the creditors.
  • There was likely not enough time to actually prepare the materials necessary to seek CCAA protection in order to obtain the stay of proceedings in time for March 30, 2020.

The Court further determined that: (i) an annulment of the Assignment would not affect the interests of EncoreFX’s creditors, (ii) there would be no harm to the integrity of the bankruptcy process, (iii) EncoreFX’s creditors had no residual interest in EncoreFX’s bankruptcy proceedings, and (iv) there was overwhelming support for the plan of arrangement in the CCAA proceedings. Lastly, no provisions in the BIA suggest that the relief available under s. 61(1) of the BIA should not be available to the analogous situation of a successful proposal being made under the CCAA. This is consistent with the objective of having harmonious insolvency statutory regimes.

Annulment Ab Initio or Not?

The Court reviewed the Trustee’s post-bankruptcy acts and actions and came to the conclusion that the timing of an annulment would not have any impact on the validity of any specific act or actions undertaken by the Trustee. The Court further determined that section 181(2) of the BIA, which preserves the sales and other actions undertaken by the Trustee in court approved transactions, was applicable to all acts and actions in this case. As a result, the Court did not feel it necessary to make a determination on whether an Assignment should be annulled ab initio under s. 181(1) of the BIA generally or whether it should be in this case.

The Assignment was therefore annulled as at the date of the granting of the Order.

This EncoreFX decision provides useful guidance regarding the appropriateness of an annulment of bankruptcy proceedings pursuant to s.181 of the BIA. This includes when a key objective is to address and manage the complexity and cost of formal insolvency proceedings by way of a transition from a bankruptcy proceeding to a CCAA proceeding.

The MLT Aikins restructuring team acted for EY throughout these proceedings.

The MLT Aikins insolvency and restructuring group comprises 23 lawyers practising in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy. If you require help navigating bankruptcy proceedings, please contact a member of the MLT Aikins insolvency and restructuring team.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.