Ontario Court Of Appeal Confirms Bondholders Not Entitled To Post-Petition Interest

The Ontario Court of Appeal (Court) recently affirmed the decision of the Ontario Superior Court of Justice in Nortel Networks Corporation (Re) (Nortel),1 that the "interest stops" rule applies in proceedings under the Companies' Creditors Arrangement Act (Canada) (CCAA)2. Specifically, the Court held that the "interest stops" rule applies in liquidating CCAA proceedings, such as Nortel, as parties retain the right to provide for the payment of post-filing interest in a CCAA restructuring plan.

The "interest stops" rule requires that creditors' claims stop accruing interest as of the date of an insolvency filing. Accordingly, the Court held that the appellant bondholders were not entitled to claim interest accruing post-CCAA filing.

Background

The appeal was brought by the Ad Hoc Group of Bondholders, representing a substantial number of unsecured "crossover bonds", for which various US and Canadian Nortel entities are liable as either principal obligors or guarantors. The CCAA does not expressly prohibit asserting a claim for post-filing interest. As a result, the crossover bondholders took the position that they were entitled to claim post-filing interest pursuant to the terms of the relevant indentures under which their bonds were issued, providing for the continuing accrual of interest until payment.

Holders of the crossover bonds filed claims for principal and pre-filing interest in the amount of US$4.092 billion against the applicable Canadian and US Nortel debtors. They also claimed an entitlement to post-filing interest which, as of December 13, 2013, amounted to approximately US$1.6 billion. These amounts represent a substantial portion of the approximately US$7.3 billion total proceeds available for distribution to all of Nortel's creditors, generated from the worldwide sale of its businesses. A successful claim for post-filing interest by the crossover bondholders would substantially reduce the amount of proceeds available for distribution to Nortel's other creditors—notably pensioners and former employees—who do not enjoy either a contractual or statutory right to post-filing interest.

The decision

Prior to the release of the lower court's decision in Nortel, it was unsettled whether unsecured creditors could claim for post-filing interest in CCAA proceedings.3 In contrast, the Bankruptcy and Insolvency Act (Canada) (BIA) does not allow unsecured creditors to claim for post-filing interest unless there is a surplus remaining...