• LF Centennial Pte. Ltd. v TRLU7228664 et al (Containers), 2015 FC 214
  • January 11, 2016 | Authors: Dionysios Rossi; Graham Walker
  • Law Firm: Borden Ladner Gervais LLP - Vancouver Office
  • The plaintiff, LF Centennial PTE Ltd. ("Centennial"), was a Singaporean company that had acted as the buying agent for Mexx Canada Company ("Mexx"). On December 3, 2014, Mexx filed a Notice of Intention to Make a Proposal ("NOI") with the Official Receiver and commenced insolvency proceedings before the Québec Superior Court (the "QCSC"). In so doing, a stay of proceedings pursuant to the Bankruptcy and Insolvency Act, RSC 1985, c B-3 was put in place. On December 23, 2014, Centennial commenced an in rem action in the Federal Court and arrested shipments of garments that had been purchased by Mexx on the basis of its interest in the cargo as an unpaid seller. Centennial did not seek leave from the QCSC before instituting the Federal Court proceedings.

    The parties reached an agreement on bail for the arrested cargo that allowed Mexx to ship the garments to its stores and sell them, as long as it deposited the proceeds into an escrow account, less certain amounts, up to a maximum of $1,100,000.

    However, Mexx and its receiver brought an application to quash the arrest and to strike the claim on the fol- lowing bases: (1) the existence of the insolvency proceedings before the QCSC, (2) the Federal Court lacked jurisdiction, and (3) the claim was an abuse of process.

    At first instance, Prothonotary Morneau determined that Centennial knew at the time it commenced the Federal Court proceedings that Mexx was the owner of the garments and held that Centennial had no right to bring this proceeding without first obtaining the permission of the QCSC, which it had not done.

    The leading decision on in rem claims in the face of bankruptcy proceedings is the Supreme Court of Canada's decision in Holt Cargo Systems Inc. v ABC Containerline NV (Trustees of), 2001 SCC 90 ("Holt"). In Holt, Holt Cargo Systems Inc. started an in rem action against a Belgian vessel and its owners in the Federal Court, claiming a maritime lien for stevedoring services in the United States. The vessel was arrested, but its owner was subsequently adjudged bankrupt by a Belgian court and the trustees in bankruptcy obtained an order from the Québec Superior Court recognizing the Belgian court order. The trustees' application for an adjournment of the in rem proceedings was denied and judgment was awarded to Holt against the ship. The Federal Court ordered the judicial sale of the vessel and declined to give effect to various stay orders from the bankruptcy court or to stay its proceedings. The Federal Court of Appeal and Supreme Court of Canada upheld the trial decision.

    Morneau P. distinguished Holt on the following bases: (1) the vessel in Holt had already been arrested and sold before the bankruptcy court intervened, and (2) in the present case, Centennial's right as a secured creditor had not yet crystallized at the time of the arrests. Morneau P. also found that Centennial and its counsel knew or ought to have known of the NOI and failed to disclose the existence of the restructuring proceedings pending before the Québec Superior Court when it applied for the arrest of the garments. Accordingly, Morneau P. ordered Centennial to respect the QCSC's orders with respect to the insolvency, ordered a stay of the Federal Court action, discharged the arrest, and dissolved the escrow agreement.

    Centennial appealed Morneau P.'s decision, arguing that he had erred in ordering the discharge of the arrest and the dissolution of the escrow agreement without applying the test for a motion to strike. Justice de Montigny, as he then was, wholly dismissed this argument since the motion seeking a stay of proceedings was distinct and alternative to the demand that Centennial's action be struck.

    de Montigny J. held that section 188(2) of the Bankruptcy and Insolvency Act is prescriptive and mandatory and requires "all courts and officers of all courts to act in aid of the [bankruptcy court]." Therefore, Morneau P. had no discretion and was obligated to ensure that the stay of proceedings was respected. Further, the proceedings before the Federal Court were ineffective because Centennial had failed to obtain leave before commencing them and had not even disclosed the existence of the restructuring proceedings to the Federal Court. Centennial also argued that section 69 of the Bankruptcy and Insolvency Act did not apply to in rem proceedings, so the Federal Court maintained its admiralty jurisdiction and could hear the action. De Montigny J. held that Holt was distinguishable from the present case given that: (1) there were significant differences between Holt and this case with regard to the timing of the bankruptcy/insolvency proceedings, (2) the Court in Holt had not discussed sections 69 and 188(2) of the Bankruptcy and Insolvency Act, and (3) Holt dealt with bankruptcy proceedings (where the objective is to facilitate distribution of a debtor's property to its creditors), while this case involved insolvency proceedings (where the objective is to allow the debtor to restructure and refinance).

    In obiter, de Montigny J. went on to consider whether the Federal Court had jurisdiction over the matter. Centennial contended that its cause of action for stoppage in transit of cargo pursuant to multimodal bills of lading fell under subsection 22(2)(i) of the Federal Courts Act. de Montigny J. dismissed this argument, finding instead that Centennial's claim flowed exclusively from contracts of sale with no maritime component and the mere fact that the garments had been carried on a ship did not establish a sufficient connection between the dispute and maritime transport. On this basis, de Montigny J. concluded that Centennial's claim did not relate to shipping and navigation and did not fall within the Federal Court's admiralty jurisdiction.