During a hearing at the commercial division of Ontario Superior Court of Justice in Toronto Tuesday, Mr. Justice Geoffrey Morawetz approved Nortel’s request for a second extension of the “stay period” that initially ended Feb. 13.
The court in January ordered that “no proceeding or enforcement process in any court shall be commenced or continued” against Nortel, and any existing proceedings are suspended until Feb. 13. That stay period was extended in February until May 1.
Last week, Nortel applied to have this stay period extended a second time, until July 30. During Tuesday’s hearing, Judge Morawetz initially expressed concern that some lawyers might not be available for a hearing in late July and suggested they consider extending the stay until “late June” but added he would agree to extending the stay period until June or July.
He called lawyers representing Nortel, Ernst & Young (its court appointed monitor) and some creditors into his library and Tuesday’s hearing ended. At press time, it was expected the court would specify the end of the new stay period this week.
Nortel filed for protection under the Companies Creditors Arrangement Act Jan. 14, the day before it was due to pay $107 million in interest on bonds. It has lost more than US$7 billion since 2005, and has since sold its application acceleration products to Radware and announced 3,700 layoffs.
During Tuesday’s hearing, Derrick Tay, a lawyer with the firm Ogilvy Renault representing Nortel, said the company and its creditors need more time to come to an agreement on a formula for transferring cash from Nortel Networks International Corp. (NNI), to Nortel Networks Ltd. (NNL), which is the Canadian subsidiary.
NNL is responsible for much of the overhead R&D costs but does not earn much revenue from selling products, whereas NNI sells products for which it does not incur R&D costs.
Tay said Tuesday Nortel and its subsidiaries have drafted an “agreement in principal” to transfer $157 million from NNI to NNL to fund fixed costs, including research and development.
But the agreement has yet to be signed.
“Creditors have said they need to understand why these payments are being made from (their) jurisdiction to (Canada’s) jurisdiction,” Tay said. He added if no agreement is reached, “what you’re doing is burning Canada’s furniture to keep creditors in other jurisdictions warm. That’s not fair.”
Although Nortel divides its operations into Canada, the U.S. and EMEA – Europe, Middle East and Africa – in reality there are “dozens” of separate jurisdictions, each with its own bankruptcy rules, Tay said.
“We need to have buy-in from the other jurisdictions,” Tay said during the hearing.
Tay said once Nortel and its creditors agree on a method of transferring the cash, they will submit it to courts in both Canada and the U.S. in late May. Judge Morawetz said as of Tuesday, he is available to hear the submission during the week of May 26-29 and Ontario court staff will confirm the availability of the United States Bankruptcy Court for the District of Delaware, which is overseeing Nortel’s U.S. subsidiary’s creditor protection south of the border.
The other parties involved in the Nortel bankruptcy hearings include several banks, Verizon Communications Inc., Bell Canada, IBM, Export Development Canada, the Informal Nortel Noteholder Group, the Official Committee of Unsecured Creditors, the Pension Benefits Guarantee Fund and the Steering Committee of Recently Severed Canadian Employees.
Though no one objected to the extension of the stay period, some lawyers representing creditors had some concerns. Ken Rosenberg, a lawyer with Paliare Roland Rosenberg Rothstein LLP representing the Superintendent of Financial Services, which administers the Pension Benefits Guarantee Fund, was concerned that only $157 million will be transferred under the agreement in principal for sending cash to Canada.
“We believe a great deal more money should be coming to Canada,” he said. “Our number is higher than $157 million.”
Alex MacFarlane, a lawyer with Fraser Milner Casgrain representing the Official Committee of Unsecured Creditors, said his group was not directly involved in drafting the framework agreement.
“What this committee desperately needs is access to information … to see if the transfer of payments from NNI to NNL are proper.”
Another lawyer representing creditors was Richard Orzy of Bennett Jones LLP, which represents the Informal Nortel Noteholder Group. He said his client supports the extension.
“The goal here is to get a restructuring which is beneficial to all,” Orzy told the court.
Although Nortel had more than $2 billion in cash when it entered bankruptcy protection in January, the company’s Canadian parent “is not sitting on a pile of cash,” Tay said.