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Substantive Consolidation of Solvent Entities? The Manitoba Court of Appeal Weighs In

In Canada, there is a relative paucity of case law – especially from appellate courts – on substantive consolidation, which is the treatment of multiple debtor companies as a single entity with one pool of assets out of which claims of creditors of all of the debtor companies are satisfied. In White Oak Commercial Finance, LLC v. Nygård Holdings (USA) Limited, 2023 MBCA 73, the Manitoba Court of Appeal recently upheld an order substantively consolidating nine debtor companies previously run by fashion magnate Peter Nygard. The Court of Appeal affirmed and applied the test for substantive consolidation set out in Redstone Investment Corporation (Re), 2016 ONSC 4453 (“Redstone”), and most notably stated, in obiter, that an entity may be subject to a substantive consolidation order even if it is solvent.


On March 9, 2020, five of the debtor companies filed notices of intention to make proposals under the Bankruptcy and Insolvency Act (Canada). On March 18, 2020, the proceedings were converted to a receivership over all nine debtor companies on application by secured lenders.

One of the debtor companies was Nygård Properties Ltd. (“NPL”), which was the real estate holding company for the enterprise. NPL was wholly owned by Nygård Enterprises Ltd. (“NEL”). The main operating company was Nygård Inc. (“NI”). Only three of the nine debtors – NPL, NI and Nygård International Partnership (“NIP”) – had realizable assets of any significance. $28.5 million was realized from the sale of real properties owned by NPL. An additional $62.7 million was realized from the liquidation of the assets of NI and NIP. After payment of disbursements and distributions to secured lenders, the net receivership proceeds left to be distributed was $9.9 million. NPL and NEL were not borrowers under the secured loan, they were guarantors.

The receiver, Richter Inc., brought a motion seeking substantive consolidation of the debtors. It was opposed by two of the debtor companies: NPL and NEL. They argued that (i) the Court could not grant substantive consolidation against them because they were solvent (they had no creditors), and (ii) it would be unfair to grant substantive consolidation as they had a secured claim against some of the other debtors since the proceeds of their assets had been used to pay the secured loans owing by the other debtors (and substantive consolidation would extinguish that claim).

The Redstone Principles and Factors

In Redstone, Regional Senior Justice Morawetz (as he then was) summarized the case law in Canada and the United States and set out the following general principles that a court should consider when determining whether to make a substantive consolidation order:

  1. Are the elements of consolidation present, such as the intertwining of corporate functions and other commonalities across the group?
  2. Do the benefits of consolidation outweigh the prejudice to particular creditors?
  3. Is consolidation fair and reasonable in the circumstances?

In applying the first of these principles, the court should evaluate whether the following seven elements of consolidation are present:

  1. difficulty in segregating assets;
  2. presence of consolidated financial statements;
  3. profitability of consolidation at a single location;
  4. co-mingling of assets and business functions;
  5. unity of interests in ownership;
  6. existence of inter-corporate loan guarantees; and
  7. transfer of assets without observing corporate formalities.

Motions Decision

Justice Edmond of the Manitoba Court of Queen’s Bench granted the receiver’s motion to substantively consolidate the debtor companies: White Oak Commercial Finance, LLC v. Nygård Holdings, 2022 MBQB 48. Justice Edmond applied the Redstone principles and concluded that:

  1. While some of the elements of consolidation were not present (such as the lack of consolidated financial statements), overall the factors and evidence indicated that the debtor companies were operated as a common enterprise;[1]
  2. The benefits of substantive consolidation to unsecured creditors – which included, employees, landlords, suppliers and other vendors and the taxing authorities – outweighed the prejudice to NPL and NEL; and
  3. Treating the debtors as separate entities for creditor purposes would result in inequitable treatment for creditors considering that the Nygard group was carried on as a common enterprise.

Court of Appeal Decision

The Manitoba Court of Appeal upheld Justice Edmond’s decision on appeal. Justice Pfuetzner, writing for the unanimous panel, affirmed that Redstone was the leading case in Canada on substantive consolidation.

In response to the argument that a substantive consolidation order could not be made against NPL and NEL because they were solvent, the Court of Appeal found that NPL and NEL were insolvent at the time they filed their notices of intention to make a proposal and at the time the receivership order was made against them – as insolvency is a necessary condition for each of those proceedings to be commenced – and they had not filed evidence sufficient to demonstrate that they were now solvent.

The Court of Appeal held, in obiter, that even if NPL and NEL were solvent, substantive consolidation can be ordered to join solvent and insolvent corporations in appropriate circumstances. The Court of Appeal noted that there was U.S. case law supporting this proposition and from a policy perspective, the equitable and orderly distribution of assets to creditors could be undermined if a substantive consolidation order could not be made against a solvent entity as an enterprise could simply lodge debt in one company and assets in another (thereby rendering the latter insulated from a substantive consolidation order because it is solvent).

The Court of Appeal held that Justice Edmond’s application of the Redstone principles was a discretionary decision that was entitled to deference and should not be overturned. The Court of Appeal held that regardless of whether NPL was a secured creditor, the relevant question was whether it was a third party secured creditor that would be prejudiced by the substantive consolidation order. NPL was not a third party: it was a debtor under receivership that was controlled by a single person as part of a common enterprise. The Court of Appeal stated that it was telling that none of the actual third party creditors took the position that substantive consolidation would prejudice them. Of course, if it is correct that NPL and NEL had no creditors, and the creditors of the other debtor companies were all better off as a result of NPL and NEL being included in the substantive consolidation, then it is not surprising that there were no third party creditors that objected to the order.


The Court of Appeal’s decision in Nygård is notable as (i) it seems to be the first strong appellate endorsement of the Redstone principles as guiding the determination on whether a substantive consolidation order should be made, and (ii) it indicates that a substantive consolidation order may be made that includes a solvent entity. Since the latter holding was made in obiter, it remains to be seen whether it is taken up by other courts in situations where the solvency of the entity has been proven more definitively, as it was not in Nygård.


[1] The elements that supported substantive consolidation were: (i) while the assets of NPL could be segregated from the assets of the other debtor companies from an ownership perspective, other debtor companies made substantial investments in those properties and bore the costs related to developing and managing those properties without reconciliation, (ii) services for the debtors was centralized and performed by employees of NIP at a single location, (iii) the business functions of the debtors were commingled as the debtors generally operated using NIP bank accounts, their creditors were tracked and managed centrally on one accounts payable sub-ledger, NIP incurred and directly paid all expenses on behalf of the debtors, all of the employees were employed by either NIP or NI who bore all labour costs, and the IT system and record-keeping was centralized, (iv) Mr. Nygard exercised general authority over all of the debtors, (v) intercompany loans existed between the various debtors, and (vi) assets and services were transferred from one debtor to another without observance of corporate formalities.

Solvent Entities Manitoba Court of Appeal Bankruptcy and Insolvency Act



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