In the Matter of MtGox Co., Ltd.

[Indexed as: MtGox Co., Ltd. (Re)]

Ontario Reports

Ontario Superior Court of Justice,

Newbould J.

October 6, 2014

122 O.R. (3d) 465 | 2014 ONSC 5811

Case Summary

Bankruptcy and insolvency — Foreign proceedings — Japanese company with registered head office in Japan operating online exchange for purchase and sale of bitcoins — Bankruptcy proceedings in respect of company commenced in Japan following loss of large number of bitcoins — Bankruptcy trustee applying under s. 269 of Bankruptcy and Insolvency Act ("BIA") for recognition of foreign bankruptcy proceedings as a foreign main proceeding — Application allowed — Trustee entitled under s. 271 of BIA to automatic stay of actions or proceedings against company in Canada — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 269, 271.

M Ltd., a Japanese company with a registered head office in Japan, operated an online exchange for the purchase and sale of bitcoins. It suspended trading after discovering that approximately 850,000 bitcoins were missing. Bankruptcy proceedings in respect of M Ltd. were commenced in Japan. The bankruptcy trustee brought an application under the Bankruptcy and Insolvency Act ("BIA") for a declaration that the Japanese bankruptcy proceedings were a "foreign main proceeding" for the purposes of the BIA and for related relief.

Held, the application should be allowed.

A "foreign main proceeding" is defined in s. 268(1) of the BIA as a foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests. Section 268(2) provides that, in the absence of proof to the contrary, a debtor company's registered office is deemed to be the centre of its main interests. The evidence established that M Ltd. had the centre of its main interests in Japan. The Japanese bankruptcy proceeding was a foreign main proceeding. The trustee was entitled under s. 271(1) of the BIA to an automatic stay of actions or proceedings against M Ltd. in Canada.

Cases referred to

Babcock & Wilcox Canada Ltd. (Re), 2000 22482 (ON SC), [2000] O.J. No. 786, [2000] O.T.C. 135, 5 B.L.R. (3d) 75, 18 C.B.R. (4th) 157, 95 A.C.W.S. (3d) 608 (S.C.J.); Braycon International Inc. v. Everest & Jennings Canadian Ltd., 2001 28471 (ON SC), [2001] O.J. No. 511, 26 C.B.R. (4th) 154, 103 A.C.W.S. (3d) 56 (S.C.J.); Lear Canada (Re), 2009 37931 (ON SC), [2009] O.J. No. 3030, 55 C.B.R. (5th) 57, 179 A.C.W.S. (3d) 46 (S.C.J.); Lightsquared LLP (Re), [2012] O.J. No. 3184, 2012 ONSC 2994, 92 C.B.R. (5th) 321 (S.C.J.); Morguard Investments Ltd. v. De Savoye, 1990 29 (SCC), [1990] 3 S.C.R. 1077, [1990] S.C.J. No. 135, 76 D.L.R. (4th) 256, 122 N.R. 81, [1991] 2 W.W.R. 217, J.E. 91-123, 52 B.C.L.R. (2d) 160, 46 C.P.C. (2d) 1, 15 R.P.R. (2d) 1

Statutes referred to

Bankruptcy Act of Japan, Act No. 75 of June 2, 2004

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 2, Part XIII [as am.], ss. 267-284 [as am.], 268(1), (2), 269 [as am.], (1), 270 [as am.], (1), 271(1), (a)

Bankruptcy Code, 11 U.S. Code, c. 11, 15

Civil Rehabilitation Act (Japan), arts. 21(1), 25(iii)

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [as am.] [page466]

Authorities referred to

Sarra, Janis, "Oversight and Financing of Cross-Border Business Enterprise Group Insolvency Proceedings", 44 Tex. Intl. L.J. 547

UNCITRAL Model Law on Cross Border Insolvency

APPLICATION for an initial recognition order under Part XIII of the Bankruptcy and Insolvency Act.

Margaret R. Sims, for applicant.

[1] NEWBOULD J.: — Nobuaki Kobayashi, in his capacity as the bankruptcy trustee of MtGox Co., Ltd., applied on October 3, 2014 for an initial recognition order pursuant to Part XIII (ss. 267 to 284) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 2, as amended ("BIA"):

(a) declaring and recognizing the bankruptcy proceedings commenced in respect of MtGox pursuant to the Bankruptcy Act of Japan, Act No. 75 of June 2, 2004 before the Tokyo District Court, Twentieth Civil Division as a foreign main proceeding for the purposes of s. 270 of the BIA;

(b) declaring that the trustee is a foreign representative pursuant to s. 268(1) of the BIA, and is entitled to bring this application pursuant to s. 269 of the BIA; and

(c) staying and enjoining any claims, rights, liens or proceedings against or in respect of MtGox and the property of MtGox.

[2] I concluded at the hearing that the relief sought should be granted, for reasons to follow. These are my reasons.

[3] MtGox is a Japanese corporation formed in 2011. It is, and always has been, located and headquartered in Tokyo, Japan. From April 2012 to February 2014, its business was the operation of an online exchange for the purchase and sale of bitcoins through its website located at http://www.mtgox.com. Bitcoins are a form of digital currency. At one time, the MtGox exchange was reported to be the largest online bitcoin exchange in the world.

[4] On or about February 10, 2014, MtGox halted all bitcoin withdrawals by its customers after it was subject to what appears to have been a massive theft or disappearance of bitcoins held by it. MtGox suspended all trading on or about February 24, 2014, after it was discovered that approximately 850,000 bitcoins were missing. These events caused, among [page467] other things, MtGox to become insolvent and ultimately led to the Japan bankruptcy proceeding.

[5] On February 28, 2014, MtGox filed a petition for the commencement of a civil rehabilitation proceeding in the Tokyo Court pursuant to art. 21(1) of the Japanese Civil Rehabilitation Act ("JCRA"), reporting that it had lost almost 850,000 bitcoins. A civil rehabilitation proceeding under the JCRA is analogous to a restructuring proceeding in Canada pursuant to the BIA or the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA").

[6] Following the filing of the Japan civil rehabilitation petition, MtGox commenced an investigation with regard to the circumstances that led to the Japan civil rehabilitation. However, by mid-April 2014, the Tokyo Court decided to dismiss the Japan civil rehabilitation petition pursuant to art. 25(iii) of the JCRA, recognizing that under the circumstances it would be very difficult for MtGox to successfully prepare and obtain approval of a rehabilitation plan or otherwise successfully carry out the Japan civil rehabilitation.

[7] On April 24, 2014, the Tokyo Court entered the Japan bankruptcy order, formally commencing MtGox's Japan bankruptcy proceeding and appointing the applicant as bankruptcy trustee.

[8] MtGox has approximately 120,000 customers who had a bitcoin or fiat currency balance in their accounts as of the date of the Japan petition. The customers live in approximately 175 countries around the world.

[9] MtGox has been named as a defendant in a pending class action filed in the Ontario Superior Court of Justice. The notice of action and statement of claim were provided to the trustee under the Hague Convention on August 29, 2014.

Applicable Law

[10] Various theories as to how multinational bankruptcies should be dealt with have long existed. Historically, many countries adopted a territorialism approach under which insolvency proceedings had an exclusively national or territorial focus that allowed each country to distribute the assets located in that country to local creditors in accordance with its local laws. Universalism is a theory that posits that the bankruptcy law to be applied should be that of the debtor's home jurisdiction, that all of the assets of the insolvent corporation, in whichever country they are situated, should be pooled together and administered by the court of the home country. Local courts in other countries would be expected, under universalism, to recognize and enforce [page468] the judgment of the home country's court. This theory of universalism has not taken hold.

[11] There is increasingly a move towards what has been called modified universalism. The notion of modified universalism is court recognition of main proceedings in one jurisdiction and non-main proceedings in other jurisdictions, representing some compromise of state sovereignty under domestic proceedings to advance international comity and co-operation. It has been advanced by the United Nations Commission on International Trade Law ("UNCITRAL") UNCITRAL Model Law on Cross Border Insolvency (the "Model Law"), which Canada largely adopted by 2009 amendments to the CCAA and the BIA.¹ Before this amendment, Canada had gone far down the road in acting on comity principles in international insolvency. See Babcock & Wilcox Canada Ltd. (Re), 2000 22482 (ON SC), [2000] O.J. No. 786, 18 C.B.R. (4th) 157 (S.C.J.) and Lear Canada (Re), 2009 37931 (ON SC), [2009] O.J. No. 3030, 55 C.B.R. (5th) 57 (S.C.J.).

[12] In the BIA, the Model Law was introduced by the enactment of Part XIII. Section 267 sets out the policy objectives of Part XIII as follows:

267. The purpose of this Part is to provide mechanisms for

dealing with cases of cross-border insolvencies and to promote

(a) cooperation between the courts and other competent authorities in Canada with those of foreign jurisdictions in cases of cross-border insolvencies;

(b) greater legal certainty for trade and investment;

(c) the fair and efficient administration of cross-border insolvencies that protects the interests of creditors and other interested persons, and those of debtors;

(d) the protection and the maximization of the value of debtors' property; and

(e) the rescue of financially troubled businesses to protect investment and preserve employment.

(f) Recognition of foreign proceeding

[13] Section 269(1) of the BIA provides for the application by a foreign representative to recognize a foreign proceeding. Pursuant to s. 270(1) of the BIA, the court shall make an order recognizing the foreign proceeding if (i) the proceeding is a foreign proceeding and (ii) the applicant is a foreign representative of that proceeding.

[14] A foreign proceeding is broadly defined in s. 268(1) to mean a judicial or an administrative proceeding in a jurisdiction outside Canada dealing with creditor's collective interests generally under any law relating to bankruptcy or insolvency in which a debtor's property and affairs are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation.

[15] The Japan bankruptcy proceeding is a judicial proceeding dealing with creditors' collective interests generally under the Bankruptcy Act of Japan, which is a law relating to bankruptcy and insolvency, in which MtGox's property is subject to supervision by the Tokyo District Court, Twentieth Civil Division. As such, the Japan bankruptcy proceeding is a foreign proceeding pursuant to s. 268(1) of the BIA.

[16] Section 268(1) of the BIA defines a foreign representative as a person or body who is authorized in a foreign proceeding in respect of a debtor company to (a) administer the debtor's property or affairs for the purpose of reorganization or liquidation or (b) act as a representative in respect of the foreign proceeding.

[17] The trustee has authority, pursuant to the Japan Bankruptcy Act and the bankruptcy order made by the Tokyo District Court in the Japan bankruptcy proceeding, to administer MtGox's property and affairs for the purpose of liquidation and to act as a foreign representative. Thus, the trustee is a foreign representative pursuant to s. 268(1) of the BIA.

[18] In the circumstances, it is appropriate to recognize the Japan bankruptcy proceeding as a foreign proceeding.

(b) Foreign main proceeding

[19] A foreign proceeding can be a foreign main proceeding or a foreign non-main proceeding. If the foreign proceeding is recognized as a main proceeding, there is an automatic stay provided in s. 271(1) against lawsuits concerning the debtor's property, debts, liabilities or obligations, and prohibitions against selling or disposing of property in Canada. If the foreign proceeding is recognized as a non-main proceeding, there is no such automatic stay and prohibition and it is necessary for an application to be made to obtain such relief. For that reason, it is advantageous for a foreign representative to seek an order recognizing the foreign proceeding as a main proceeding. The trustee in this case has made such a request.

[20] A foreign main proceeding is defined in s. 268(1) as a foreign proceeding in a jurisdiction where the debtor company has [page470] the centre of its main interests ("COMI"). Section 268(2) provides that in the absence of proof to the contrary, a debtor company's registered office is deemed to be the centre of its main interests.

[21] In considering whether the registered office presumption has been rebutted, a court should consider the following factors in determining COMI: (i) the location is readily ascertainable by creditors; (ii) the location is one in which the debtor's principal assets and operations are found; and (iii) the location is where the management of the debtor takes place. See Lightsquared LLP (Re), 2012 ONSC 2994, [2012] O.J. No. 3184, 92 C.B.R. (5th) 321 (S.C.J.).

[22] The trustee relies on the following facts in support of his position that the COMI of MtGox is in Japan and not in Canada:

(1) MtGox has no offices in Canada, there are no Canadian subsidiaries and no assets in located in Canada;

(2) MtGox is and has always been organized under the laws of Japan;

(3) MtGox's registered office and corporate headquarters are, and have always been, located in Japan, and its books and records are located at its head office in Japan;

(4) the debtor's sole director and representative director, Mr. Karpeles, resides, and at all relevant times has resided, in Japan;

(5) most of the MtGox's bank accounts are located in Japan, including the primary account for operating its business;

(6) MtGox's parent company, Tibanne, provided operational and administrative services to it, including the provision of its primary workforce, in Japan;

(7) MtGox's website clearly disclosed to customers and other third parties that it is a Japanese corporation that is located in Japan;

(8) upon the filing of the Japan petition, MtGox commenced an investigation in Japan with regard to the circumstances that led to the Japan civil rehabilitation, which investigation was subject to the oversight of the Tokyo Court.

[23] Taking into account this evidence, I am satisfied that the COMI of MtGox is its registered head office in Japan and that the Japan bankruptcy proceeding is a foreign main proceeding. [page471]

Stay of Proceedings

[24] The effect of recognition of a foreign main proceeding is an automatic grant of the relief set out under s. 271(1) of the BIA:

271(1) Subject to subsections (2) to (4), on the making of an order recognizing a foreign proceeding that is specified to be a foreign main proceeding,

(a) no person shall commence or continue any action, execution or other proceedings concerning the debtor's property, debts, liabilities or obligations;

(b) if the debtor carries on a business, the debtor shall not, outside the ordinary course of the business, sell or otherwise dispose of any of the debtor's property in Canada that relates to the business and shall not sell or otherwise dispose of any other property of the debtor in Canada; and

(c) if the debtor is an individual, the debtor shall not sell or otherwise dispose of any property of the debtor in Canada.

[25] The trustee seeks recognition of the Japan bankruptcy proceeding in an effort to maximize recoveries to, and provide for an equitable distribution of value among, all creditors. In particular, the trustee believes that the enjoining of the ongoing litigation against MtGox in Canada, in conjunction with the protections afforded by the Japan bankruptcy proceeding, is essential to this effort.

[26] In Braycon International Inc. v. Everest & Jennings Canadian Ltd., 2001 28471 (ON SC), [2001] O.J. No. 511, 26 C.B.R. (4th) 154 (S.C.J.), prior to the adoption of the Model Law in Canada, a stay of an action in Ontario against a United States corporation subject to bankruptcy proceedings in the U.S. under c. 11 of the U.S. Bankruptcy Code, 11 U.S. Code, c. 15, in which there was a stay of all proceedings against it was ordered pursuant to the comity principles recognized in Morguard Investments Ltd. v. De Savoye, 1990 29 (SCC), [1990] 3 S.C.R. 1077, [1990] S.C.J. No. 135.

[27] The Model Law, which was adopted in Japan in 2000, provides a transparent regime for the right of foreign creditors to commence or participate in an insolvency proceeding in another state. See Dr. Janis Sarra, supra, at footnote 1. Section 271(1)(a) of the BIA provides for an automatic stay in furtherance of that objective. As the Japanese foreign proceeding is a foreign main proceeding, the trustee is entitled to that automatic stay. The Tokyo Court has order ordered a process for claims to be made with a filing date of no later than May 29, 2015.

[28] There have been two class actions commenced against MtGox in the U.S. The trustee has obtained recognition of the Japan bankruptcy proceedings in the U.S. under c. 15 of the [page472] U.S. Bankruptcy Code as a foreign main proceeding, resulting in an automatic stay of the U.S. litigation. The trustee is entitled to the same relief in Canada relating to the class action filed in Ontario.

[29] At the conclusion of the hearing on October 3, 2014, I signed an order reflecting these reasons.

Application allowed.

Notes

1 See Dr. Janis Sarra, "Oversight and Financing of Cross-Border Business Enterprise Group Insolvency Proceedings", 44 Tex. Intl. L.J. 547.

End of Document