Arbitration Versus The "Single Proceeding Model" In Insolvency Proceedings ' Which Prevails?

• Published date: 13 June 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution
• Law Firm: McCarthy Tétrault LLP
• Author: The International Arbitration Blog, Mark Browne and Andrew Kalamut

Overview and Why This Case Matters

In Royal Bank of Canada v Mundo Media Ltd¹, the Ontario Superior Court of Justice found the presence of an arbitration clause between two parties did not preclude a court-appointed Receiver in the insolvency proceedings from asserting claims by the debtor against third parties not involved in the insolvency proceedings.

This is noteworthy, as typically the 'single proceeding model' in the context of insolvency proceedings is meant to centralize claims by creditors against the debtor, not claims by the debtor against other third parties.

While the 'single proceeding model' has typically been a 'shield' to protect debtors from having to defend claims in multiple proceedings or jurisdictions, the Court has opened the door to the 'single proceeding model' being used as a 'sword' to permit a Receiver to select the forum in which it will pursue a claim on behalf of a debtor contrary to a valid, binding international commercial agreement.²

This case matters because it provides a carve-out for a stay of proceedings in cases where a debtor claims against a third party where a binding arbitration clause exists. What was once, perhaps, viewed as pro-forma, is no longer such if this decision becomes the prevailing approach.

Background

This case centers around two parties: Mundo Media Ltd. ("Mundo") and SPay Inc. ("SPay").

Mundo is a technology company operating in Canada and the United States while SPay is a sports management technology company which also operates in both jurisdictions.

On April 9, 2019, Mundo was placed in receivership by the Ontario Superior Court of Justice pursuant to s. 243 of the Bankruptcy and Insolvency Act ("BIA").³

The appointment order authorized the Receiver to exercise all remedies available to Mundo, to collect money owed to Mundo and prosecute proceedings with respect to Mundo and its property. As such, the Receiver asserted a claim against SPay for what it says is money owed to Mundo from a contract between Mundo and SPay.

In fact, SPay had two contracts with Mundo, both of which were executed in 2017. One was a Management and Support Agreement ("the First Agreement") and the second was a Publisher Agreement ("the Second Agreement"). Mundo's Receiver asserted that SPay owed Mundo $4.1 million under the First Agreement. That was Mundo's largest outstanding account receivable owing in the receivership.⁴ As part of its presumptive defence, SPay asserted a right of set-off relating to amounts owing to it...