Court Of Appeal Confirms The 'Interest Stops Rule' Applies In CCAA Proceedings

On October 13, 2015, the Ontario Court of Appeal (the "Court of Appeal") upheld1 a CCAA judge's decision that the "interest stops rule" applies in CCAA proceedings, which significantly limits unsecured creditors' ability to recover interest accrued after the date of a debtor's insolvency.

Background

In January 2009, Nortel Networks Corporation and its Canadian affiliates (collectively, the "Canadian Nortel debtors") filed for and obtained protection under the Companies' Creditors Arrangement Act (Canada) ("CCAA"), while Nortel Network Inc. and other U.S. affiliates (collectively, the "U.S. Nortel debtors") filed petitions in Delaware under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").

Under the claims procedures in both the CCAA and Chapter 11 proceedings, holders of Nortel bonds (the "Bondholders") made claims for principal and pre-filing interest against the Canadian and U.S. Nortel estates. The Bondholders also claimed post-filing interest and other related claims under the terms of the bond indentures. The monitor and the Canadian Nortel debtors, with the support of Nortel's pensioners and former employees, objected to any distribution of the proceeds from Nortel's asset sales to the Bondholders in payment of post-filing interest, on the basis that the interest stops rule at common law disallows post-filing interest. The Bondholders argued that the interest stops rule does not apply in CCAA proceedings, relying on the Supreme Court of Canada's decision in Re Canada 30002 and the subsequent decision of the Court of Appeal in Re Stelco3 as binding authorities for the proposition that the interest stops rule does not apply in CCAA proceedings.

The CCAA judge, Justice Newbould of the Ontario Superior Court of Justice, held that the common law interest stops rule applies in CCAA proceedings.

Decision on Appeal

A three-member panel of the Court of Appeal unanimously dismissed the Bondholders' appeal and upheld Justice Newbould's decision.

Origin and scope of interest stops rule

According to the Court of Appeal, the interest stops rule originated as "a necessary corollary" of the pari passu principle at common law. That principle states that the insolvent debtor's assets are to be distributed among classes of unsecured creditors rateably and equally in payment of the debts as they existed at the date of insolvency. Two purposes underpin the pari passu principle: fairness to creditors and orderly administration of an insolvent...