Assigning a Delaware corporation into bankruptcy in Canada?

Re Winning Brands Corporation
How do you determine whether a debtor resides in Canada?

Summary: In this case, the Court considered a request by a debtor — a Delaware corporation — to strike or permanently stay a bankruptcy application commenced against it by a creditor in Ontario. The debtor argued that it operated only in Delaware, did not own any property in Canada, did not have licenses or pay taxes in Canada, was not registered to do business in Ontario (or elsewhere in Canada) and had no place from which to do business in Ontario. The Court refused the request based on extensive public filings and representations made by the corporation, which made clear that the corporation did, in fact, carry on business in Ontario. In addition, the Court found that the loan agreements contained a forum clause in favour of Ontario.

The debtor, Winning Brands Corporation (“WBC”), moved for an order to strike or permanently stay a bankruptcy application commenced against it by a creditor, Charles Perlman. The purported basis for the motion was that WBC is a Delaware corporation, operates only in Delaware, does not own any property in Canada, does not have licenses or pay taxes in Canada, is not registered to do business in Ontario (or elsewhere in Canada) and has no place from which it does business in Ontario.

WBC argued that in order for a foreign entity/debtor to be subject to Canadian bankruptcy law, a sufficient “nexus” must be shown between the foreign corporation and the Canadian court in which the Canadian creditor is seeking to assign the corporation into bankruptcy. This, in turn, boils down to whether or not the insolvent person at the time when an act of bankruptcy was committed by him resided or carried on business in Canada.

While acknowledging one or more cases in which foreign corporations, including Delaware corporations, have been successfully assigned into bankruptcy in Canada, WBC asserted that it does business exclusively in the United States, is registered and listed on the US Securities and Exchange Commission Over-the-Counter Market, and pays taxes in the United States. It claimed that it has many American secured and unsecured creditors, and an assignment in bankruptcy would impact those creditors. Finally, it argued that Ontario was not a convenient forum for these proceedings, and that it did not attorn to the jurisdiction of the Ontario courts to hear them.

Perlman argued that the Ontario bankruptcy court had jurisdiction over WBC. First, the underlying loan agreements (the “Loan Agreements”) giving rise to WBC’s debt to Perlman, and in respect of which Perlman obtained a contested judgment in Ontario, each contained a forum clause confirming that all proceedings between the parties “related to the subject matter of this Agreement” may be commenced in Ontario, at Perlman’s sole discretion. The Loan Agreements were drafted by the CEO of WBC, who owned 95% of the Preferred Shares of WBC, and, through that shareholding, exerted “voting control” over WBC. It was not contested that the CEO lived in Barrie, Ontario.

Second, there was no doubt that WBC carried on business in Ontario. WBC had represented to the public and investors for years that it conducts business out of an office in Barrie, Ontario. In its public disclosure, WBC referred to this Barrie office as its “principal executive office”, its “formal business office” or its “principal place of business.” During the relevant period, WBC’s website displayed the Barrie address. On January 26, 2023, WBC issued a press release advising of its new headquarters location in Toronto, and signed an indemnity to the landlord for any amounts owing by its subsidiary under the Toronto lease.

The Court found that, based on extensive public filings and representations, WBC carried on business in Ontario. It may have done so improperly or illegally (if it was never registered or licensed in Ontario) but there was, nonetheless, no doubt that it carried on business there.

Third, with respect to assets in Ontario, Perlman argued WBC owned assets—being the shares of its subsidiaries—in Ontario. Fourth, there was no question that WBC’s debts were incurred while conducting business in Ontario. Those debts were confirmed by the Court, and remain outstanding. In such circumstances, the debtor is deemed to carry on business within the jurisdiction of the court until the debts have been satisfied, and a creditor has the right to file a petition in the Province of Ontario on the basis that the debtor is carrying on business here.

In the Court’s view, there was an overwhelming preponderance of evidence linking WBC to Ontario, and no basis to stay or strike Perlman’s application. As such, the Court dismissed WBC’s motion and held that Perlman was entitled to his costs of the motion.

Judge: Justice Black

Counsel: Josh Suttner and Shaun Parsons of Aird & Berlis for Charles Perlman; Matthew Harris for Winning Brands Corporation