Out of Control: Yukon Court Lifts Stay in BC Proposal Proceedings of Mining Company

In Yukon (Government of) v. Yukon Zinc Corporation, 2019 YKSC 39 (“Yukon Zinc”), the Yukon Supreme Court recently lifted a stay of proceedings imposed in proposal proceedings commenced in British Columbia by Yukon Zinc, a Vancouver-based mining company whose principal asset is the Wolverine Mine in Yukon. The lift stay was granted to allow the Government of Yukon to commence receivership proceedings in the Yukon Supreme Court in an attempt to recover its costs of remediating the closed mine.

This case is the latest, and most notable, example of what appears to be a growing penchant by courts to work around the “single control” model and grant relief with respect to bankruptcy proceedings commenced in other jurisdictions.

Most troublingly, whereas courts had previously crafted specific exceptions where the single control model could be avoided, Yukon Zinc may create a much broader exception based on a balancing of connecting factors. If other courts were to follow this lead, it could become easier for creditors to seek relief against an insolvent company in various provinces other than where the bankruptcy is proceeding, which may seriously undermine the efficiency that the single control model is designed to achieve.

The Single Control Model

The Bankruptcy and Insolvency Act (“BIA”) contemplates that all proceedings related to a particular bankruptcy should proceed in a particular “command centre” located in the “locality of the debtor.” This is referred to as the “single control” model and it is designed to ensure “the economy of winding up the bankrupt estate, even at the price of inflicting additional cost on its creditors and debtors.” (Eagle River International Ltd., Re, 2001 SCC 92 (“Eagle River”) at para. 77) The single control model also applies to proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). Generally, if a creditor wishes to seek some relief with respect to a bankrupt, they must do so in the bankruptcy court in the jurisdiction that the bankruptcy was commenced.

Recent Exceptions

In previous articles, we outlined the decisions in:

  • Arrangement relatif à Ferreira, 2018 QCCS 3891 (Ferreira), where the Quebec Superior Court annulled an assignment in bankruptcy that had been filed in Ontario in an attempt to subvert bankruptcy proceedings already underway in Quebec (see here); and
  • JRB v. Jimenez, 2018 ABQB 847, where the Alberta Court of Queen’s Bench lifted a stay of proceedings that had been imposed as a result of consumer proposal proceedings commenced in Ontario, to permit a civil action alleging sexual assault to proceed (see 34.2 BFLR 297).

In these decisions, the courts appeared to craft narrow exceptions to the single control model where:

  • The bankruptcy proceedings were not commenced in the “locality of the debtor”; or
  • The relief sought is with respect to a debt that is not compromised by the bankruptcy or proposal.

Yukon Zinc: Underwater

Yukon Zinc is incorporated in BC and has its head office in Vancouver. Its principal asset is the Wolverine Mine, a large zinc-silver-copper-lead-gold underground mine in Yukon. The Mine has been temporarily closed and under a care and maintenance program since January 2015. In March 2015, Yukon Zinc commenced CCAA proceedings which concluded in October 2015 with the implementation of a plan of compromise and arrangement. However, production at the mine has not been restarted to date.

In 2015, Yukon Zinc provided security to the Government of Yukon of approximately $10.5 million for the projected costs of care, maintenance and remediation. In 2018, the Government increased the amount of security required to approximately $35.5 million due to flooding at the Mine and the generally worsening environmental conditions on site. Yukon Zinc failed to post this security and stopped paying its workers that remained on site. In October 2018, the Government of Yukon commenced remediation work and estimated that it will have expended $6 million on this work by the end of its current fiscal year, with the costs eventually far exceeding the $10.5 million security posted by Yukon Zinc.

The Government of Yukon served notice of its intention to enforce its security on July 3, 2019 and filed a petition to appoint a receiver on July 17, 2019. On July 31, 2019, the day before the petition was to be heard, Yukon Zinc filed a notice of intention (NOI) to make a proposal in bankruptcy in British Columbia.

The filing of the NOI created an automatic stay of all proceedings against Yukon Zinc, including the receivership petition. The Government of Yukon asked the Yukon Supreme Court to lift the stay of proceedings to allow the receivership petition to proceed.

Locality of the Debtor

Sections 50.4 of the BIA provides that an insolvent person may file a NOI in the insolvent person’s “locality.” The “locality of the debtor” is defined in the BIA as the principal place:

(a) where the debtor has carried on business during the year immediately preceding the date of the initial bankruptcy event,

(b) where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event, or

(c) in cases not coming within paragraph (a) or (b), where the greater portion of the property of the debtor is situated.

There is case law (Flax Investment Ltd., Re, 1979 CarswellOnt 248 at para. 12) that suggests it is possible for a debtor to have more than one locality. In this instance, there were multiple connecting factors to both British Columbia and the Yukon and, unlike Ferreira, the Yukon Supreme Court could not as easily disregard the BC proposal proceedings as having been commenced in a jurisdiction that was inappropriate. The noteworthy aspect the decision, as discussed below, is that the Yukon Supreme Court held that the Yukon was the proper jurisdiction to hear the lift stay application without considering whether the NOI was properly filed in British Columbia.

Yukon Court Applies Substantial Connection Test

The Yukon Court proceeded to evaluate whether it would grant an exception to the single control model and hear the lift stay application notwithstanding the fact that the NOI proceedings may have been properly commenced in BC.

The leading decision on the “single control” model in bankruptcy proceedings is the Supreme Court of Canada’s decision in Eagle River. In that case, the Court held that as long as the debtor has commenced proceedings in its “locality”, all related proceedings are to be controlled by the bankruptcy court of that jurisdiction. If a creditor or other interested party can establish that the proceedings would be more economically administered in another jurisdiction, or for “other sufficient cause”, the original court may transfer the proceedings to that other jurisdiction (BIA, s. 187(7)). Justice Binnie wrote as follows for the Court:

In the present case, we are confronted with a federal statute that prima facie establishes one command centre or "single control" (Stewart , supra, at p. 349) for all proceedings related to the bankruptcy (s. 183(1)). Single control is not necessarily inconsistent with transferring particular disputes elsewhere, but a creditor (or debtor) who wishes to fragment the proceedings, and who cannot claim to be a "stranger to the bankruptcy", has the burden of demonstrating "sufficient cause" to send the trustee scurrying to multiple jurisdictions. Parliament was of the view that a substantial connection sufficient to ground bankruptcy proceedings in a particular district or division is provided by proof of facts within the statutory definition of "locality of the debtor" in s. 2(1). The trustee in that locality is mandated to "recuperate" the assets, and related proceedings are to be controlled by the bankruptcy court of that jurisdiction. The Act is concerned with the economy of winding up the bankrupt estate, even at the price of inflicting additional cost on its creditors and debtors. (para. 77, emphasis added)

The Yukon Supreme Court excerpted this entire paragraph and interpreted it as holding that “the proper forum or venue for a bankruptcy application is generally determined by a substantial connection test.” (para. 32) The Court then proceeded to balance the various factors connecting Yukon Zinc and the Government’s application for a lift stay to either BC or Yukon. The Court concluded that there were “more substantial connections to the Yukon in this matter” (para. 41) and the Yukon Supreme Court was thus the proper forum to hear the lift stay application.

One of the perplexing aspects of the decision in Yukon Zinc is that the Supreme Court in Eagle River appeared to actually reject the argument that the proper forum for a particular motion or application related to a bankruptcy (such as a lift stay) should be decided on a substantial connection test. In Eagle River, Justice Binnie wrote:

The appellant, relying on Amchem, supra, argues that this dispute has its most real and substantial connection to British Columbia, and that the motions judge erred in principle in ignoring relevant factors in coming to the opposite conclusion.

Again, with respect, I do not think this position is sustainable on the law or the facts.

In the first place, as stated, the Amchem approach has to be applied here with full regard to the context of Canadian bankruptcy legislation. This appeal involves the allocation of a particular bankruptcy matter within a single national bankruptcy scheme created by the Act. … The Court looks not only at the Amchem factors, but must strive to give effect to Parliament's intent to create an economical and efficient national system for the administration of bankrupt estates, as evidenced in the Act… It is in the public interest to facilitate the speedy resolution of the fallout from a financial collapse…

The "balancing test" advocated by the appellant based on the Amchem factors and general principles of private international law fails to take these important public policies into account. The Quebec Superior Court sitting in Bankruptcy is, in a very real sense, sitting as a national court. (paras. 72-78)

Having concluded that it had jurisdiction to grant the lift stay, the Yukon Supreme Court did so on the basis that the Yukon Government would be materially prejudiced if the stay continued to apply to it.

Single Control Model Continues to be Undermined

The reasoning of the Yukon Supreme Court in Yukon Zinc appears to conflict with the reasoning in Eagle River and has the potential to undermine the public interest in the efficient administration of bankruptcy estates that the Supreme Court clearly articulated in that case. While it was unfortunate for the Government of Yukon that Yukon Zinc commenced NOI proceedings in BC the day before its receivership petition was to be heard in Yukon, at that juncture the proper procedure would have been to apply to the BC court to either (i) lift the stay of proceedings, or (ii) transfer the proceedings to Yukon. Doing so would have prevented a multiplicity of proceedings and allowed all interested parties to be heard on the matter in a single forum.

In light of these several recent examples of courts granting exceptions to the single control model, and especially considering the potential breadth of the exception created in Yukon Zinc, some guidance from an appellate court on the exceptions to the single control model that should be permitted would be welcome at this stage.

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