Friday, 14 December 2012

Foreign Suppliers can Play Hard Ball in CCAA Proceedings

Foreign critical suppliers, if located in a country where enforcement of a Canadian judgment would be difficult, may be able to require payment in full despite an order in a CCAA proceeding requiring suppliers to the debtor company to continue supplying goods.   Such was the recent decision of Brown J. in ReNorthstar Aerospace.  Changsha Zhongchuan Transmission Machinery Co. Ltd. (“Changsha”) refused to ship certain components to Northstar Aerospace Inc., despite an order to do so, unless paid US$135,266 for certain pre-CCAA- filing shipments.  Without Changsha’s products, the debtor could not continue to operate, and a sale of the debtor would abort.  No practical alternative source for the goods existed. No creditor opposed an order for Changsha to be paid. 

Justice Brown, noting that enforcement of the order against Changsha could not occur in a timely fashion, acknowledged that allowing payment amounts to “rewarding the improper conduct by a critical supplier who has ignored an order of this court”  and to “countenancing a form of hard-ball queue jumping”. That said, the only practical course of action to keep Northstar operating pending closing of the sale of Northstar was to ensure continued supply from Changsha by paying it.    

Orders of the type issued against Changsha, namely an injunction (to continue supplying  Northstar) as opposed to an order for payment of damages, are enforceable as a foreign judgment in very few jurisdictions outside Canada.   In other words, suppliers in many countries can consider the hard ball strategy Changsha successfully deployed against Northstar.  However, this is not an option for suppliers in other Canadian provinces.

In the result, the funds available to pay the debts of Northstar’s creditors, including other suppliers that continued to supply Northstar at their financial risk, was reduced by US$135,266.
This outcome highlights the need for Canada to negotiate treaties to ensure that Canada’s openness to enforcement of judgments is matched by its trading partners.   In the six years since the Supreme Court of Canada repealed the ban on enforcement of foreign non-monetary judgments in ProSwing Inc. v Elta Golf,  Canadian courts have enforced several such judgments, and have rarely refused to enforce them.   Few countries besides Canada will enforce foreign non-monetary judgments at all.   Enforcement of a Canadian judgment in the People’s Republic of China, even one for damages only let alone one for a mandatory injunction, is practically impossible.   The B.C. Supreme Court recently ruled that enforcement of foreign arbitral awards in that country is “irregular”, despite being a signatory to the New York Convention: see Blue Horizon Energy v. Ko Yo Development andGuangan Lotusan Natural Gas Chemical