Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147

May 18, 2022

Is a receiver bound by an arbitration clause in an agreement it wishes to sue on?

Mundo Media (“Mundo”), a company which carried on business in Canada and the US, was placed in receivership in April 2019. The appointment order authorized the Receiver to exercise all remedies available to Mundo, collect money owed to Mundo, and prosecute proceedings with respect to Mundo and its property. A US recognition order was issued by the Delaware bankruptcy court in July 2019.

SPay, a company incorporated in Delaware, had two contracts with Mundo. The Receiver claimed that SPay owed Mundo $4.1 million under one of the contracts and sought to assert this claim on behalf of Mundo’s creditors by way of a motion for judgment in the receivership proceedings in the Ontario Superior Court of Justice. The SPay receivable was Mundo’s largest outstanding account receivable owing in the receivership.

The SPay contract contained an arbitration clause requiring any disputes to be arbitrated in New York according to the JAMS Comprehensive Arbitration Rules & Procedures and applying New York law. Accordingly, Spay sought a stay of the Receiver’s motion for judgment, and a direction that the Receiver must pursue any claim against SPay by way of an arbitration in New York.

The UNCITRAL Model Law on International Commercial Arbitration, which is incorporated by reference in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5, requires the court to refer a matter to arbitration upon a party’s request if the parties and the matter in dispute are subject to an arbitration agreement and the arbitration agreement is not null and void, inoperative or incapable of being performed. A stay of proceeding must be granted unless there is some cogent reason to ignore the express terms of the arbitration clause. Here, the issue was whether the arbitration clause was rendered null and void, inoperative or incapable of being performed by virtue of Mundo’s receivership.

The Receiver relied upon the reasoning of the British Columbia Court of Appeal in Petrowest Corporation v. Peace River Hydro Partners. The Court was not prepared to adopt the reasoning of the BCCA in Petrowest because there was a “serious question about whether the doctrine of separability has any application to circumstances such as these where the Receiver is purporting to sue on an agreement made by the debtor with a third party which contains an arbitration clause”. The Court was not persuaded by the logic and reasoning of the BCCA, and since that decision was not binding on the Court and was subject to a pending decision on appeal to the Supreme Court of Canada, the Court declined to follow it.

The Receiver also relied upon the principle of the “single proceeding model” to deny the stay. SPay argued that this model is only meant to centralize claims by creditors against the debtor, not claims by the debtor against third parties. SPay suggested that the model serves as a “shield” to debtors from having to defend claims in multiple proceedings or jurisdictions. The Court disagreed with SPay, noting that while the majority of applications of the single proceeding model concern creditor claims against the debtor, the model also applies to claims advanced by the debtor against a third party.

Claims by a debtor against a third party may be required to be heard in the insolvency proceedings rather than in the jurisdiction or proceedings that would otherwise have applied. The determining factor is the degree of connection of the claim to the insolvency proceedings. That degree of connection has been characterized as involving a consideration of whether the third party is a “stranger to the bankruptcy”.

SPay argued that it was a stranger to the bankruptcy because, inter alia, it had not participated in the receivership proceedings in any way, other than bringing this motion for a stay. The Court again disagreed. The receivership proceedings were properly brought in the Ontario Superior Court of Justice. Therefore, the Superior Court had jurisdiction over the debtor, including its assets and liabilities. This jurisdiction was recognized in this very case by a reciprocal enforcement order issued from the Delaware bankruptcy court.

The Receiver’s claim properly related to a matter which was subject to the 2019 appointment order. The claim against SPay was potentially Mundo’s most significant account receivable available to the Receiver. The fact of the receivership raised different considerations from those that would be relevant to a purely private, contractual relationship. Although the Receiver would be asserting Mundo’s claim against SPay, other Mundo creditors would have a significant interest in the prosecution of that claim and may want to participate in the hearing of that claim.

The Receiver sought to realize on a significant Mundo asset for the benefit of all creditors, while SPay intended to assert—in whatever forum—its own claim against Mundo by way of the defence of set-off. Requiring the Receiver to commence arbitration proceedings in New York would be unfair to Mundo’s creditors, and inconsistent with the object of the Bankruptcy and Insolvency Act to, inter alia, enhance efficiency and consistency and avoid the chaos and inefficiency of multiple proceedings and of potentially sending the Receiver “scurrying to multiple jurisdictions”.

Accordingly, the Court dismissed the motion for a stay of the Receiver’s claim against SPay.

Judge: Penny J.

Counsel: Matthew P. Gottlieb, Bradley Vermeersch and Xin Lu (Crystal) Li of Lax O’Sullivan Lisus Gottlieb for the moving party, SPay Inc. and Scott McGrath and Rachel Nicholson of Thornton Grout Finnigan for Ernst & Young Inc., the Court Appointed Receiver of Mundo Media Ltd.

By Matilda Lici