Nortel Allocation Trial A Cross-Border First, But Will It Be Worth It?

The ongoing Companies' Creditors Arrangement Act [CCAA]1 proceeding of Nortel Networks Inc. et al. is certainly not the first Canadian-based restructuring with assets spread through different jurisdictions, to which creditors from those different jurisdictions have laid competing claims. Almost all major Canadian insolvencies experience this to some extent. However, Nortel is, it seems, the first such restructuring where the amounts at issue are large enough, and the affected creditor groups diverse and active enough, to prevent what Canadian insolvency professionals are usually able to do: agree on a consensual solution that is close enough to perfect.2 Unfortunately, in the Nortel insolvency, the difference between "close enough" and "perfect" could easily be hundreds of millions of dollars. One can only speculate that it is very hard to convince one's clients to take a settlement when so much might potentially be left on the table.

Having been unable to settle the matter, the parties are to be subject to the institution of a simultaneous, bi-jurisdictional trial to determine which court or courts shall be entitled to distribute what share of the remaining $7.3 billion of proceeds derived from the liquidation of Nortel.

A Cross-Border Matter from the Start

At the outset of the Nortel CCAA, a cross border protocol was established to manage the matter in the various jurisdictions. On January 14, 2009, Nortel Networks Corporation, Nortel Networks Limited, Nortel Technology Corporation, Nortel Networks International Corporation, and Nortel Networks Global Corporation filed for and obtained protection under the CCAA.3

The Initial Order provided a stay of proceedings4 and ordered that the cross-border protocol become effective upon its approval by the U.S. Bankruptcy Court and that the parties to these proceedings and any other Person shall be governed by it.5

Cross-Border Insolvency Protocol (the "Protocol") included the following criteria:

None of the U.S. Debtors or Canadian Debtors are applicants in both the U.S. Proceedings and the Canadian Proceedings.6 The Protocol shall not divest nor diminish the U.S. court's and the Canadian court's respective independent jurisdiction, and each court shall have sole and exclusive jurisdiction and power over the conduct of their respective proceedings.7 Each court recognizes the validity of the stay of proceedings and actions against the Debtors.8 Effectively simultaneous with the filing in the U.S. and Canada, similar proceedings and orders were granted in the U.K. and in Israel.9,10,11,12

In this fashion, the framework was established for simultaneous bankruptcy proceedings in multiple jurisdictions. However, the question of how to divide the proceeds realized from this multijurisdictional web of assets was deferred to a later date. That is the matter now before the courts in Canada and the U.S. (the various Nortel estates, including Nortel UK and Nortel entities located in Europe, the Middle East, and Africa (known as EMEA Debtors), agreed to be bound by the jurisdiction of the U.S. and Canadian courts in 2009 pursuant to the terms of the Interim Funding and Settlement Agreement).

The Issue: Who Gets What?

The central issue that gives rise to the Allocation trial is the potential impact of the different priority of the different claims for different groups of stakeholders in different...