Dr. Janis Sarra is a presidential distinguished professor and professor of law at the Allard School of Law, University of British Columbia, and author of more than 60 publications on insolvency law. She is former director of the Peter Wall Institute for Advanced Studies.
This week, Justice Frank Newbould of the Ontario Superior Court and Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware issued long-awaited judgments in the Nortel case, finding that $7.3-billion (U.S.) in assets should be distributed on a shared basis among all the creditors.
Justice Newbould held that both the Canadian and U.S. companies and their subsidiaries would be unjustly enriched if they were allowed to keep virtually all the proceeds of the asset sales, and that it was necessary to "do what is just" in the circumstances.
In the U.S. judgment, Judge Gross found that all parties had flawed proposals that, if accepted, would lead to extreme outcomes favouring one group of creditors. Both judgments recognized the issue of fairness and equity in resolution of the issues, an important principle of insolvency law, particularly since insolvency, by its very nature, means that there are not enough assets to meet all creditors' claims against the company.
The judgments resolve a long-standing dispute in which observers and parties alike worried that all the resources would go to legal and financial experts rather than to creditors. Nortel was a blue-chip company in Canada, with 130 subsidiaries operating in 100 countries. In 2009, deteriorating market conditions and weakening customer commitments resulted in Nortel commencing formal insolvency proceedings in Canada, the United States and England.
The initial intent was to attempt to restructure the business, but it became apparent that going forward, a viable business was not feasible. There was a globally agreed-upon sale process, resulting in $7.3-billion in proceeds from sales of the lines of business and residual patent portfolio. The sale process agreement worked well as a strategy to maximize value, but it had a serious flaw: It did not set out a formula for allocation of the proceeds.
While parties should be able to assert their claims, the disproportionate negative effects of protracted litigation on smaller creditors are tremendous. While the Ontario court made important interim decisions granting hardship relief to some pensioners and disabled employees, resources were still highly imbalanced in representation at the joint hearings and the incentives to settle were skewed.
Hence, the judgments are refreshing in their comprehensiveness and effort to resolve the myriad issues and get the resources into the hands of creditors. The result is as fair and equitable as could have been achieved in the circumstances. Justice Newbould observed that the court has broad jurisdiction to make orders necessary to do justice between the parties, drawing on direct authority given to the court under Canadian legislation and the Supreme Court of Canada's direction that the legislation be interpreted to meet contemporary business and social needs.
It speaks to the flexibility of the Canadian legislation in its goal of facilitating solutions to company failure that balance multiple interests and advance the public interest. For example, the Canadian court ruling observed that interim distributions would be especially important for the predominantly elderly pensioner population and disabled employees who have endured hardship as a result of the loss of their benefits, but also for other creditors who have waited years for a distribution on their claims.
While the Ontario and Delaware courts were not required to arrive at the same outcome, it is incredibly important they did so, in that there are no mechanisms for co-operation at the appeal court level in either country if there had been discordance in the outcomes. The well-reasoned detailed judgments should send an important message to the parties that the case should be over and further resources should be directed toward creditors, not toward the lawyers and financial experts. There is still the task of specific allocations to creditors, including pensioners, at the local country level, but at this point in the prolonged six-year proceedings, it is time to resolve the matters expeditiously and to pay out the pensioners and other creditors, rather than engage in further litigation in an appeal.
Few people dispute that professionals need to be paid for their services and that parties need lawyers and financial professionals to help guide them through complex insolvency cases. However, the Nortel case represents the extreme in the amount of fees directed away from creditors to professionals, with more than $1-billion already paid to the experts, illustrating the problem of uncontrolled costs.
While recognizing the importance of the professionals in the complex proceedings, Justice Newbould nevertheless observed that "insolvency practitioners, academics, international bodies and others have watched as Nortel's early success in maximizing the value of its global assets through co-operation has disintegrated into value-erosive adversarial and territorial litigation described by many as scorched-earth litigation."
It is time for the Nortel parties to finally resolve the claims and place the money where it should be, in the hands of the pensioners and the other creditors.