Lexpert US Guides

40 | LEXPERT • December 2014 | www.lexpert.ca COURT-APPOINTED MONITORS against any party. Rather, the monitor generally restricts itself to pro- viding the court with its views on the commercial consequences of the positions of the parties. erefore, the representations, suggestions and conclusions of the monitors are given substantial weight, and the courts give them considerable deference and, in most instances, are guided by their advice. 3.THE INDEPENDENCE OF THE MONITOR As a result of the monitor's numerous mandates, confl icts can arise if stakeholders begin to question the balance between the multiple in- terests at stake. is concern will also increase when stakeholders real- ize that the monitor is a professional chosen and paid by the debtor company that will obtain, in virtually all cases, a charge ranking ahead of the secured creditors to guarantee its fees. us, monitors have a duty to act independently with integrity and impartiality in assisting with the restructuring. Monitors are also man- dated to act honestly and in good faith, comply with a prescribed code of ethics and act in the best interests of all stakeholders in the proceed- ings. Should a monitor breach these duties, the court may, upon an ap- plication of a creditor, replace it and appoint another licensed trustee to act as monitor. To ensure that monitors are impartial and that they be perceived as such, they are required to be independent from the debtor company. For example, they cannot have been related to a director or have been the auditor of the debtor company at any time during the two preced- ing years of their appointment. Furthermore, to protect the impartiality of the monitor and to keep it out of adversarial CCAA proceedings, 13 courts, especially out- side the province of Québec, have usually held that the monitor can- not be compelled or cross-examined by parties to the restructuring. However, courts have recognized that the monitor can and should collaborate with the creditors and be available to answer questions on its reports. 14 In the common-law provinces, it has been established that only in unusual or exceptional circumstances can a monitor be subjected to cross-examination on the basis of its reports. 15 ese circumstances in- clude the monitor's refusal to answer questions on the report as may be reasonably requested by the creditors 16 or partiality manifested by the monitor towards a party to the CCAA proceedings. 17 Even in these circumstances, the courts have favored informal and nonconfronta- tional approaches such as the submission of written questions to the monitor or an out-of-court interview. 18 4. THE ROLE OF THE MONITOR IN CROSS-BORDER RESTRUCTURINGS Recognition of CCAA Proceedings Under Chapter 15 In 2005, Canada and the United States each adopted the Model Law on Cross-Border Insolvency of the United Nations Commission on Internation- al Trade Law (the "Model Law"). e Model Law is a United Nations initiative to harmonize national insolvency regimes in order to facilitate the effi cient and equitable administration of cross-border insolvencies. Canada implemented the Model Law through the 2009 amend- ments to the BIA and the CCAA. Since the amendments, Part IV of the CCAA has functioned as a complete code governing cross-border insolvencies under the CCAA. e United States has incorporated most of the Model Law through Chapter 15 of the US Bankruptcy Code ("Chapter 15"). By virtue of Chapter 15, a debtor company un- der CCAA protection must have the CCAA proceedings recognized in the United States if any orders rendered by the Canadian courts are to have extraterritorial eff ect. To commence the process under Chapter 15, the debtor company must select an individual to act as a foreign representative of the debtor company. e foreign representative is the person who applies to the court for recognition of the foreign insolvency proceedings on behalf of the debtor company. Although the debtor company can act as for- eign representative, we have seen in numerous cases the monitor, in its capacity as court-appointed offi cer, named as a "foreign representative" under Chapter 15 proceedings. is is, from a Canadian restructuring perspective, an extension of the monitor's duties and obligations. e Monitor Can Play a Role as a Dealmaker in Cross-Border Restructurings Most scholars, practitioners and commentators have stated that the restructuring process in the United States under Chapter 11 is much more adversarial and litigious than under the CCAA process. For the debtor company, a more litigious restructuring will generally mean a more expensive and time-consuming restructuring. We believe that monitors can play a key role in reducing the adversarial side of a re- structuring and consequently the fees and time associated therewith. As the court's independent and impartial offi cer, the monitor can assist the parties in resolving their disputes or, at the very least, limiting the scope of disputes. e monitor can be exceptionally useful at me- diating disputes given that (i) it speaks (to a certain extent) on behalf of the court and (ii) the parties know very well that the monitor will eventually have to provide its comments to the court on the relative merit of each party's point of view and how the conclusions sought by the parties will aff ect the debtor company's restructuring. What the monitor thinks carries a lot of weight before the courts and thus may encourage the parties to resolve their disputes. e Monitor Can Be the Watchdog of the Canadian Creditors in a Cross-Border Restructuring Illustrations of the watchdog role of the monitor can be found in the cross-border restructurings of White Birch Paper Holding Company and of the US electronic retailer Circuit City and of its Canadian sub- sidiary, Intertan. In the Circuit City matter, Circuit City fi led under Chapter 11 in Virginia and obtained an interim order approving a DIP facility, which required a guarantee by Intertan and a court-ordered charge ranking in priority over unsecured creditors. Intertan subsequently commenced restructuring proceedings under the CCAA and sought an order from the court granting a charge over its assets to secure the US DIP facility. e Canadian court was advised that the charge was a non-negotiable condition precedent to the DIP lenders' provision of the DIP facility and that without this facility, the US business would fail. e court granted the order sought. Circuit City and its UCC subsequently agreed to exclude certain assets from the scope of the DIP security in the United States, which had the indirect eff ect of in- creasing the Canadian creditors' exposure. Intertan's monitor fi led a report to the Canadian court to the eff ect that the US DIP facility and the Canadian DIP security could allow unsecured creditors of Circuit City to have access to the applicant's assets and achieve recovery ahead of the unsecured creditors of Intertan. Accordingly, the monitor ap- plied for, and the Canadian court issued, various orders aimed at pro- tecting the interests of Intertan's unsecured creditors. 19 In the White Birch Paper Holding Company matter, the Canadian debtors (collectively, "White Birch Canada") obtained protection un- der the CCAA in February 2010. e Québec Superior Court subse- quently approved a stalking horse bid process for the sale of the vast majority of the assets of White Birch Canada and of its US subsidiary, Bear Island, which had itself commenced proceedings under Chapter 11. 20 e monitor subsequently fi led a report to bring ongoing discus-

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