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Using mediation, case management in insolvency disputes

Lawyers and their clients are increasingly willing to explore out-of-court settlement and management in bankruptcy and insolvency disputes to avoid the time and cost of a full-blown adjudication process, says The Hon. Colin L. Campbell Q.C.

“Those lawyers who are familiar with the Companies Creditors Arrangement Act (CCAA) are used to the negotiation process necessary to achieve a plan under the statute and to the engagement of neutrals to assist in the process,” says Campbell, a founding member of Amicus Chambers, which provides full option-based services in all aspects of alternative dispute resolution and dispute resolution for mediation, arbitration and case-management solutions.

“The bankruptcy regime with its more rigid priority delineation relies on the court system to adjudicate the priority dispute process,” he says.

“As with every other aspect of civil litigation, much of the bankruptcy dispute process has become more expensive and more prolonged than many of those caught up in the process — whether they be creditors, debtors or even third parties — are willing to accept.”

How can this process work? Campbell tells AdvocateDaily.com that lawyers and their clients first have to agree that third-party neutral involvement will assist. Counsel will then need to discuss and agree on the background, qualifications and experience of the person who can best assist, bearing in mind what types of dispute will be involved.

As bankruptcy involves court supervision — and ultimately court orders — Campbell says counsel should advise the court of what is intended by way of mediation and/or management.

“A judge’s order or direction may assist where one or more of the parties to a court proceeding are unwilling to participate in mediation,” he says.

A mediation/management agreement should be prepared to outline what issues will be dealt with through the process. If the parties and their counsel are unable to agree on an appropriate individual to conduct the mediation, the court may be willing to assist by choosing from a list of mediators/case managers.

Campbell — who sat on the bench of the Superior Court of Ontario from 1998 to 2013 and was a key judge on the Commercial List from 2000 to 2002 and 2008 to 2013 — explains the CCAA threshold of $5 million in assets means that many corporations are unable to use that statutory regime.

“As much of the civil dispute process has become more contentious in recent years, there is simply not enough by the way of assets in many bankrupt estates to permit a full-out adjudication of what are often complicated disputes,” he says.

He says one of the complicating factors in a number of bankruptcies is where fraud is involved.

“Few creditors are willing to see a fraudster get away with it and many are willing to risk little or no recovery in order to punish what they see as a fraudulent debtor,” Campbell says. “Other creditors may be more than willing to take less than they might be entitled to, rather than risk total loss, by incurring the legal fees that could be the cost associated with a total loss.”

He says in order for mediation management to be effective in insolvency disputes, there must be a sufficient degree of trust and respect between counsel involved and their clients.

“The object is to avoid the time and cost of a full-blown adjudication process. In order for the process to be effective, there must be an understanding that the factual background necessary for resolving the dispute will be disclosed and exchanged,” he says.

A competent, experienced mediator can help bring out those facts necessary for resolution, he says.

“Many of the complicated bankruptcies require resolution of discrete disputes before overall resolution can be achieved. Some examples may assist. A disputed priority claim — such as tax, lien or other security — may hold up resolution of other disputes,” he says. “Without either agreement or adjudication of such a dispute, those who were involved as ordinary or general creditors simply do not know where they stand.”

As a result, mediation of those claims will have to await the resolution of other disputes.

“Litigation of those priority disputes or a situation where one creditor seeks to continue its claim against an alleged fraudster beyond bankruptcy, cannot only prolong the process but substantially deplete the estate,” Campbell says. “In most instances, a willingness by those involved, or at least most involved, to achieve agreement to an out-of-court process will be accepted by the court.”

A report to the court from a respected mediation neutral can allow a judge to provide the direction that will assist the timing and cost of the overall process.  

“Wise counsel will wish to engage their clients in exploring those out-of-court processes that may be in their clients’ interests in bankruptcy situations,” Campbell says.

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