Requiring receiver to commence arbitration proceedings 'unfair' to creditors
The Ontario Superior Court of Justice ruled that a court-appointed receiver is not bound to adhere to an existing arbitration agreement entered into by a company before insolvency proceedings began.
Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147 involved Mundo Media, an advertising technology company that carried business across Canada and the US. Mundo entered into two contracts with SPay, a US-based sports management technology business. Under the management and support agreement, SPay agreed to pay Mundo for content distribution. Meanwhile, the publisher agreement provides that SPay would receive payment for performance ad units provided exclusively to Mundo.
Both contracts contain an arbitration clause requiring parties to arbitrate any disputes “arising out of or relating to the agreements” in New York under the JAMS Comprehensive Arbitration Rules and Procedures and the New York law.
In Apr. 2019, Mundo was placed in receivership by a court order issued by the Superior Court under s. 243 of the Bankruptcy and Insolvency Act. The court order authorized the receiver to exercise all remedies available to Mundo, collect money owed to Mundo, and prosecute proceedings concerning Mundo and its property. In July 2019, the Delaware bankruptcy court issued a reciprocal enforcement order.
During the insolvency proceedings, the receiver claimed that SPay owed Mundo $4.1 million under the management and support agreement and asserted this claim through a motion for judgment. Meanwhile, SPay contended that Mundo owed it substantial amounts under the publisher agreement. Spay said it plans to assert these obligations through set-off in any collection proceedings the receiver brings.
SPay then sought a stay of the receiver’s motion for judgment and an order requiring the receiver to pursue any claim against it through arbitration in New York.
SPay argued that it was a “stranger to the bankruptcy” since it did not participate in the insolvency proceedings other than bringing a motion for a stay. It also argued that both parties agreed to arbitrate all disputes arising from their contractual relationship, and the law favours enforcement of arbitration clauses.
The Superior Court dismissed the motion for a stay of the receiver’s claim against SPay under the management and support agreement.
According to the court, there was no evidence to prove that the insolvency proceedings were improperly initiated. Thus, it has jurisdiction to hear and decide the receiver’s claim against SPay.
“This jurisdiction has been recognized in this very case by a reciprocal enforcement order in the United States issued from the Delaware bankruptcy court,” Justice Michael Penny wrote. “The receiver’s claim properly relates to a matter which is subject to the 2019 order, i.e., to exercise all remedies available to Mundo, to collect money owed to Mundo, and to prosecute proceedings with respect to Mundo and its property.”
Moreover, the court held that requiring the receiver to commence arbitration proceedings in New York would be “unfair to Mundo’s creditors” and “inconsistent with the object of the BIA” to avoid the chaos and inefficiency of multiple proceedings and potentially sending the receiver “scurrying to multiple jurisdictions.”
The court also disagreed with SPay’s contention that it will suffer any prejudice by requiring it to assert its set-off in the insolvency proceedings.
“All of the relevant procedural protections available in a New York arbitration are capable of being reproduced, if necessary and appropriate for the just and equitable management of this case, within the context of the receiver’s claim in the insolvency proceedings for $4.1 million under the management and support agreement,” Justice Penny said.