An interesting decision arising out of the Nortel litigation was rendered by Justice Newbould in August. The main claimants in the Canadian proceedings to allocate the Nortel assets are a group of unsecured bondholders on the one hand, and Nortel disabled employees, former employees and retirees on the other. The bondholders have a contractual right to interest. The other major claimants do not. The post-filing interest on the bonds has been growing at various compounded rates since the filing and amounted to US $1.6 billion by the time of the hearing. In the meantime, interest on the US $7.3 Billion of liquidated assets of Nortel is not growing at any appreciable rate because of the conservative nature of the investments made pending the outcome of the insolvency proceedings. The non-bondholder creditors were clearly losing ground.
The bondholders sought an order that they are legally entitled to receive the interest due under their various bonds beyond the outstanding principal debt and pre-petition interest at the time of filing. The monitor and the remaining parties argued that the bondholders were not entitled to any post-filing interest as a result of the ‘interest stops rule’.
The ‘interest stops rule’ had been applied to cases in Canada in the past under the Winding-up and Restructuring Act and Bankruptcy and Insolvency Act (‘BIA’). Neither Act makes specific provision in regard to interest after filing; however, our courts have applied the interest stops rule under the common law. The rule flows from the fundamental tenet of insolvency law that all debts shall be paid pari passu (‘on equal footing’) and all unsecured creditors should receive equal treatment.
The Nortel proceedings in Canada were commenced under the Companies’ Creditors Arrangement Act (‘CCAA’), and the issue of whether the interest stops rule applies in proceedings under the CCAA had not ever been determined (the CCAA also makes no provision for post-filing interest).
Justice Newbould, in a thorough analysis, concluded that the interest stops rule can be applied in CCAA proceedings, and that it should apply in the Nortel case. He observed that it has long been recognized that the insolvency regime under the CCAA and BIA creates a complementary and interrelated scheme. It would disrupt this regime to treat creditors differently under one Act as opposed to the other. If the interest stops rule were to apply only under the BIA and not the CCAA, creditors not enjoying the benefit of post-filing interest would be encouraged to file for bankruptcy thus defeating the objectives of the CCAA to encourage reorganization over insolvency.