Canada: Reform of Canadian Insolvency Legislation

Last Updated: February 22 2008
Article by Aubrey E. Kauffman

Insolvency law in Canada falls within the federal domain. The Bankruptcy and Insolvency Act (the "BIA") contains provisions dealing with the restructuring of debtors through "proposals" (usually used for individuals or, smaller corporations) or, the "bankruptcy" (a liquidation and distribution process) of debtors. The Companies' Creditors Arrangement Act ("CCAA") contains provisions dealing with the restructuring of larger enterprises.

For the past several years, a Parliamentary process has been ongoing with respect to reform of insolvency legislation. As a result of complex and somewhat byzantine legislation substantive amendments to insolvency legislation are now in place, awaiting only formal activation. It is anticipated that these provisions will become law sometime within the next six months.

The purpose of the amendments is to provide additional protection for employees, codify existing case law and practice, bolster the proposal process and conform Canadian laws to international practice.

The amending the legislation deals with the following topics:

  1. Unpaid Wages -- a new act, the Wage Earners Protection Program Act (the "WEPP") will provide for payment of up to $3,000 per worker in wage arrears by the federal government. The federal government will be subrogated into the workers' rights. In addition the BIA has been amended to create a super priority charge of up to $2,000 per worker for arrears of wages secured on all of the current assets of a debtor. Similarly, the CCAA has been amended to provide that a plan of arrangement can only be approved by the court, if certain wage arrears of terminated employees are protected.
  2. Unpaid Pension Contributions -- in order to further protect workers, a security interest has been created to protect unpaid pension contributions (not including deficiency claims). This security interest forms a super priority charge over all of the assets of the debtor. Undoubtedly, the security interests created with respect to arrears of wages and pension contributions will cause considerable concern to lenders as these liabilities are difficult to quantify and would rank in priority to general security agreements.
  3. Collective Agreements -- unlike the position under the US Bankruptcy Code the amendments provide, in essence, that collective agreements cannot be revised without the agreement of the Union.
  4. Treatment of Executory Contracts -- the rules with respect to disclaimer and assignment of executory, non-real property, contracts have been clarified. Contrary to existing law executory non-real property contracts can now be assigned in certain circumstances. Also the rights of licensees of intellectual property are now protected.
  5. Interim Financing -- the ability to obtain interim financing (DIP lending) in a restructuring (both under the BIA proposal provisions and under the CCAA) has been codified and the criteria for the court ordering such financing have been formalized.
  6. Receivers and Receivership Proceedings -- the current anomaly whereby "interim receivers" appointed under the provisions of the BIA are acting as full-blown receivers has been addressed. Interim Receivers will now truly be "interim". A new federal receivership regime has been created, though the powers of such a receiver are not clear.
  7. Sale of Assets -- the practice under the CCAA permits sales of assets out of the ordinary course during the restructuring. This has not been permitted in BIA restructuring. The amendments now permit sales of assets out of the ordinary course under both regimes and set out the parameters for obtaining court approval of such sales. There are special rules with respect to sales to "related persons". The law with respect to granting of vesting orders has now been codified.
  8. Governance Issues -- the court has now been granted the power, under both restructuring regimes, to remove a director who is unreasonably impairing the possibility of a viable plan or is likely to act inappropriately as a director. Unfortunately, the court is not given any criteria to apply in making its assessment of such conduct.
  9. Judicial Charges -- in addition to granting a judicial charge to secure interim financing (DIP loans), a practice has grown in restructurings under the CCAA for the court to grant administration charges to secure certain professional fees and, so-called Directors Charges to secure court ordered indemnities of directors who remain on board during the restructuring. These charges have now been codified and have been extended to restructurings under the BIA. The criteria for granting such charges is now specifically set out.
  10. Critical Suppliers -- there has been significant confusion and inconsistency in the treatment of critical suppliers. The amendments to the CCAA now provide for the designation of a supplier as a critical supplier by the court. If such designation is made, the critical supplier is obliged to continue to supply on terms and conditions consistent with its pre-filing relationship with the debtor. The critical supplier is granted a judicial charge to secure payment for the goods or services provided. Curiously, no parallel provision is created with respect to a restructuring under the BIA.
  11. Transfers at Undervalue -- the existing confusing rules with respect to "settlements" and "reviewable transactions" are being removed in favour of provisions dealing with any "transfer at undervalue". Any transaction with a debtor having a consideration conspicuously less than the fair market value of the property or service sold is subject to review. The time parameter, with respect to the review, varies depending upon whether the counterparty was or was not at arm's length. The remedy will be a monetary judgment for the delta between the fair market value of the consideration and the amount actually paid or received.
  12. Subordination of Equity Claims -- the law in this area has been clarified. Claims related to rescission of or a misrepresentation related to a purchase and sale of a share or unit of the debtor will be subordinated to claims of creditors and treated as equity claims.
  13. Inclusion of Income Trusts -- both restructuring regimes have been modernized in order to provide for the restructuring of income trusts that have assets in Canada and whose units are traded on a prescribed stock exchange . This is a very useful amendment given the growth of income trusts in recent years.
  14. Cross-Border Insolvency Provisions -- the existing provisions under the BIA and CCAA are repealed and replaced by comprehensive provisions based upon the United Nations Commission on International Trade Law Model Law. The revisions are intended to promote cooperation in cross-border insolvency proceedings by authorizing the courts to coordinate and cooperate with each other, by restricting the scope of local (Canadian) insolvency proceedings when foreign proceedings have been commenced and by granting relief to representatives of foreign proceedings. The provisions are similar to those of Chapter 15 of the U.S. Bankruptcy Code.
  15. Other Amendments -- in addition to the above, numerous technical amendments have been made to the existing provisions of the BIA and CCAA. These amendments include changes with respect to unpaid suppliers' rights and the status of registered retirement savings plans.

The above amendments represent substantial changes in Canadian insolvency and restructuring laws. These changes may have significant impact upon lending practices in view of the creation of various super priority charges, as well as upon the use of BIA proposals as vehicles for restructurings. Only time will tell what the full impact of these significant changes will be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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