Not only has the last year been marked by a new Canadian government under the leadership of conservative Prime Minister Stephen Harper, it has also brought about significant revisions to Canada’s federal insolvency statutes.
In the fall of 2003, the Canadian Senate’s Banking, Trade and Commerce Committee completed its five-year review of insolvency legislation and delivered a detailed series of recommendations for reform. Many of the proposed recommendations were incorporated into Bill C-55, which was tabled in the Canadian House of Commons in June 2005.
Parliament originally intended to hold detailed committee hearings before the bill was voted upon; however, by the fall of 2005, it became clear that that Parliament would soon be dissolved so that a federal election could be held. Since bankruptcy reform was a key priority for the government, and the proposed legislation would die if an election was called, Parliament agreed to “fast track” Bill C-55. The bill was passed by the House of Commons and the Senate in November 2005 on the understanding that it would not come into force until further Parliamentary hearings were held after the election, and in any event not before June 30, 2006.
Bill C-55 amends Canada’s two major insolvency statutes, the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). It also creates a Wage Earner Protection Act Program Act.
Some of the key provisions of Bill C-55 provide for:
- a protection plan for wage earners in the event of insolvency, combined with a super-priority over current assets;
- a super-priority for pre-filing pension contributions;
- the ability for a court to remove directors who might impair the ability of a corporation to make a viable proposal or plan;
- court-appointed receivers under the BIA;
- the adoption in principle of the UNCITRAL Model Law;
- expanded powers to reverse transactions at undervalue or those that create a preference;
- a bar preventing amendments to, or termination of, collective agreements unless the parties consent; and
- a prohibition on a company’s auditor from acting as monitor under the CCAA.
A number of these provisions merit further comment.
Unpaid Wages and Pension Contributions
First, Bill C-55 creates a new and wide-ranging regime to deal with salary claims of workers. The legislation creates a Wage Earner Protection Plan (WEPP) that provides up to $3,000 in compensation for unpaid salary and vacation pay (but not severance or termination pay) to each worker that loses his or her job because of bankruptcy or receivership of their employer. The federal government, as sponsor of the WEPP, obtains the right to make a subrogated claim against the bankrupt company and/or its directors to recoup any funds paid.
Parliament has given employees a “super-priority” for unpaid wages earned in the six months before the bankruptcy or receivership of their employer (to a maximum of $2,000). The super-priority – which ranks ahead of all other security – only applies to current assets such as inventory, cash and accounts receivable.
On a related matter, Parliament has created a super-priority over all assets for unpaid pre-filing pension contributions (but not unfunded pension liabilities) of a company in bankruptcy and receivership. For insolvent companies that intend to restructure under the CCAA or the proposal provisions of the BIA, a court may not approve a plan or proposal unless it provides for full payment of these outstanding contributions.
Directors
After a well-publicized battle concerning the removal of directors during Stelco’s CCAA proceeding, Parliament has specifically enacted provisions in the CCAA and BIA that empower a court to remove a corporate director if there is good reason to believe that he or she will unreasonably impair a company’s ability to make a viable proposal or plan.
Recognizing the importance of preventing skilled corporate directors from resigning, Parliament has authorized the courts to create a priority charge against the insolvent company’s assets to cover the liabilities that directors may incur between the filing date and the completion of the BIA proposal or CCAA restructuring process.
BIA Receivers
Under existing legislation in most Canadian provinces, secured creditors can apply to the court for the appointment of a receiver to gather up and realize on the debtor’s property. However, since these court-appointed receivers did not automatically have any right to deal with property in other provinces and for other strategic reasons, creditors started to use the “interim receiver” provisions of the BIA to create de facto Canada-wide receiverships that were, in substance, almost the same as full receiverships under provincial law. The wide-ranging use of the BIA interim receiver provisions went far beyond what legislators had originally intended. (Interim receivers were really only to be appointed for short-term purposes to protect and preserve a debtor’s property pending a bankruptcy order, proposal or the enforcement of security.)
In Bill C-55, Parliament has created a new court-appointed receiver under the BIA. Not only will such receivers have the same customary powers as receivers appointed under provincial law – namely to take possession of and deal with an insolvent person’s property – but they will also have automatic authority across Canada (and therefore there will be no need to obtain separate court orders in each province where property is located). Hopefully, the new provisions will prevent any further abuse of the interim receivership provisions of the BIA while giving secured creditors another powerful tool to realize on their security.
The UNCITRAL Model Law on Cross-Border Insolvency
Although Canada already has useful provisions in the BIA and CCAA to recognize and assist foreign insolvency proceedings, Parliament decided to accept the recommendation in the 2003 Senate committee report that the UNCITRAL Model Law be adopted. Unfortunately, the implementation of the Model Law contained in Bill C-55 is rather confusing. For example, the wording of many articles of the Model Law has been changed, and approximately 12 of the 32 articles in the Model Law have been partially or entirely omitted from the Canadian legislation.
Canada’s approach to the Model Law differs significantly from the approach taken in the United States. While Congress essentially copied the Model Law into the new chapter 15 of the Bankruptcy Code – almost verbatim and using the same numbering scheme – it is hard to tell at first glance which articles have been enacted in Canada. Despite these shortcomings, it is fair to say that Canada has recognized and offered assistance with respect to foreign insolvency proceedings and will continue to do so.
Next Steps
Even though the above-noted June 30, 2006, deadline has come and gone, Bill C-55 has not moved closer toward coming into force. To date, no hearings have been held to review the statute and there is no present timetable for such hearings. However, many stakeholders have recognized that there are certain technical errors in the wording of the statute that will likely require correction. Since it would be dangerous to proclaim Bill C-55 in force before these errors are corrected, it appears almost certain that the bill will not come into force until corrective amendments are tabled in Parliament and enacted. Since Parliament will not resume until late September, Bill C-55 will not take effect for at least several months.