Vol 12 (2015) - Issue 4

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The Nortel ‘Allocation’ Decisions: Nortel Networks Corporation (Re), 2015 ONSC 2987 and In re Nortel Networks Inc. et al., 09-10138 (Delaware Bankruptcy Court)

Introduction
On 12 May 2015, two important decisions were simultaneously handed down by Judge Gross of the Delaware Bankruptcy Court and Justice Newbould of the Ontario Superior Court of Justice, in the Nortel bankruptcy’s 'allocation' proceedings.
The issue the Courts had to decide was how to divide up the USD 7.3 billion – currently held in an escrow account referred to as the 'Lockbox' – between Nortel’s debtor estates. Those funds represent the proceeds of sale from the liquidation of Nortel’s global business lines and residual assets.
The Courts jointly held that the sale proceeds should be allocated on a 'pro rata' basis. In essence, the pro rata approach involves sharing the Lockbox proceeds among the various insolvent companies rateably in proportion to the creditor claims which exist against each company.
In what is self-evidently an unusual situation, both Courts were seised of this matter. The trial was held over a number of weeks in 2014 with the Courts sitting jointly in Delaware and Toronto, connected by video link, and the proceedings broadcast across the world by private internet link. The Courts had agreed they should hand down their decisions on the same day. It was also agreed that the Judges were permitted to speak to one another in the course of deliberating on their separate decisions, there being a Cross-Border Insolvency Protocol in place between the Delaware Bankruptcy Court and the Ontario Court to facilitate coordination in the respective Nortel bankruptcy proceedings. There was, however, naturally no requirement that the Judges should necessarily come to the same decision.

The procedural history
This unusual situation arose as follows.
Nortel had been put into insolvency proceedings on 14 January 2009 by way of co-ordinated filings by its Canadian entities in Toronto, its U.S. entities in Delaware, and its European, Middle East and African ('EMEA') entities in London.
In the early stages, those administering the insolvencies recognised the integrated nature of Nortel’s businesses and material assets. They concluded that a coordinated liquidation of the business lines and assets was important if value for creditors was to be maximised. Being such a highly integrated business, Nortel’s value existed in various business lines, which traversed geographic boundaries. No one officeholder could therefore be confident of maximising value for creditors in selling, independently from the others, the assets in that office holder’s sole possession or jurisdiction. Rather, such assets were ultimately offered for sale together with the other assets (located elsewhere) that formed part of the same business line.
Recognising that the question of how much of the sale proceeds each selling debtor company should receive was a difficult one, the officeholders agreed not to let disagreement on that issue hold up the liquidation process. In a post-filing 2009 agreement, they therefore agreed to pool the sale proceeds in escrow pending agreement as to how much each selling debtor should receive, or resolution of that question by one or more 'dispute resolvers'.
Accordingly, between 2009 and 2012, the business and residual assets of the Nortel group were sold. The proceeds came to USD 7.3 billion, more than half of that coming from the sale of Nortel’s residual patent portfolio generated over many years of research and development ('R&D') effort.
By 2012, the liquidation process was substantially complete and the question of how much each debtor company should receive needed to be agreed. However, the parties were unable to reach agreement, and by early 2013 no fewer than three formal mediations had taken place with a view to settling these issues. As such, the parties fell back on the dispute resolution provisions of the 2009 agreement. There was in fact some preliminary litigation as to what that agreement provided for in this respect, and that issue was finally determined during 2013, with the Delaware and Ontario Courts holding that they had jurisdiction to decide the 'allocation' issue sitting together.