EncoreFX Inc. (Re), 2023 BCSC 39

January 25, 2023

What is the appropriate way to address extant bankruptcy proceedings after debts have been dealt with under a subsequent CCAA?

EncoreFX Inc. (“EncoreFX”) was in the business of providing foreign exchange or “FX” risk management services and cross-border payment solutions. On March 30, 2020, it made an assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act. A year later, on the Trustee’s application, the Court granted an initial order to allow EncoreFX to obtain creditor protection under the Companies’ Creditors Arrangement Act.

The CCAA proceedings moved quickly. In April 2021, the Monitor filed a plan of arrangement and in May 2021, the Plan was approved by both the requisite creditors and the Court. The Monitor subsequently continued its collection efforts and distributed all monies in accordance with the Plan. On November 2, 2022, the Court granted an order to conclude the CCAA proceedings and discharge the Monitor. The only remaining issue was how to address EncoreFX’s still extant bankruptcy proceedings under the BIA. EncoreFX was still a “bankrupt” pursuant to the assignment filed under the BIA, although its assets and debts were subsequently addressed within the CCAA proceedings.

The Trustee proposed a means of concluding the BIA proceedings through a declaration that EncoreFX’s bankruptcy is annulled ab initio. The Superintendent of Bankruptcy supported that such an annulment would be appropriate.

Annulment of a bankruptcy of a company is addressed in the BIA. Section 181(1) only allows an annulment if the court first determines that the “assignment ought not to have been filed”. An annulment of a bankruptcy is a discretionary remedy and is to be used sparingly, in special circumstances. In exercising its discretion, the court must take into consideration and balance all the interests of all stakeholders, including the creditors, the bankrupt and third parties. Circumstances considered by the courts as justifying annulments of both assignments and bankruptcy orders include:

  1. Improper use of the BIA or improper motive;

  2. Failure to refer the court to all material facts;

  3. Abuse of process, including in relation to matrimonial proceedings; and

  4. Lack of notice.

In March 2020, global FX markets had atypical levels of volatility, mainly driven by the impact of the pandemic. Due to this extreme market volatility, a number of EncoreFX’s client were “out of the money” on their transactions and subject to margins calls. However, many of those clients were unable to pay the margin calls due to their own financial distress, including arising from the pandemic. As a result, EncoreFX was “out of the money” with its own lenders and required to pay significant additional margin payments to them.

On March 26, 2020, EncoreFX first approached the Trustee and, over the following three days, considered various formal or informal restructuring options that may have been available. EncoreFX made an urgent decision to assign itself into bankruptcy before foreign exchange trading commenced on March 30, 2020, as they deemed this to be the most expeditious and simplest insolvency proceeding which would allow them to obtain an immediate stay of proceedings by the filing of the assignment with the Superintendent.

The administration of the BIA proceedings proved to be exceedingly complicated and many issues were not contemplated in the extremely tight time frame within which a decision to make an assignment into bankruptcy was made. The Trustee’s assessment was that CCAA proceedings would be more beneficial than BIA proceedings because CCAA proceedings would allow the contested claims to be settled and resolved more simply, allowing for greater recovery to the creditors.

The filing of the assignment was an advisable course of action given the information known to EncoreFX and the Trustee at the time. There were clearly exigent circumstances at play and time was not on anyone’s side in terms of allowing a full consideration of all options that might have been undertaken. All options other than an immediate filing of an assignment into bankruptcy would have required time, which EncoreFX and its stakeholders did not have.

Potentially knowable critical information was not available to EncoreFX when it filed the assignment because of time pressures, and only became known after the fact. Specifically, the secured creditors’ security interest in EncoreFX was deficient; various property claims would be disallowed; and EncoreFX’s bank would permit the electronic funds transfers to occur notwithstanding the stay of proceedings. Had these matters and the full complexity of the issues been fully understood at the time when the assignment was filed, other options would have been more fully analyzed and considered, and EncoreFX would have chosen the path of the CCAA restructuring as better serving the interests of the stakeholders. In that sense, the filing of the assignment by EncoreFX “ought not to have been made”.

An annulment of the EncoreFX’s bankruptcy under s. 181 was, therefore, appropriate. The creditors overwhelmingly accepted the Plan advanced in the CCAA proceedings, and had no residual interest in the bankruptcy proceedings that might be served by refusing an annulment. Interpreting s. 181 to allow an annulment in EncoreFX’s unique circumstances was consistent with the overall statutory objectives of Canada’s insolvency regime. Those objectives include promoting as much flexibility as is appropriate toward allowing debtors to fashion creative solutions to what can be complex financial issues, all for the benefit of the stakeholders.

Accordingly, the Court concluded that an annulment was appropriate in the circumstances and ordered that EncoreFX’s BIA proceedings be annulled.

Judge: Justice Fitzpatrick

Counsel: William Skelly of MLT Aikins for EY as Trustee in Bankruptcy

By Matilda Lici