The reform of Canada’s insolvency laws continues to move forward slowly. In an article published in a previous edition of this newsletter, I outlined the proposed amendments to Canada’s two major insolvency statutes, the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) under Bill C-55. The Canadian Parliament enacted Bill C-55 in November 2005, shortly before Canada’s federal election, on the understanding that it would not come into force until further Parliamentary hearings were held after the federal election and in any event not before June 30, 2006.
In early 2006, a minority conservative government led by Stephen Harper was elected. Thereafter, the government consulted with major insolvency stakeholder groups and received numerous recommendations about further amendments to the CCAA and the BIA as well as certain technical amendments to Bill C-55.
On Dec. 8, 2006, the Canadian government gave notice of a “ways and means motion” to amend the BIA, the CCAA, Bill C-55, and the Wage Earner Protection Program Act (which was created by Bill C-55). This motion is the first stage of the legislative reform process and will almost certainly be followed by the formal introduction of a new bill in Parliament.
The ways and means motion substantially amends Bill C-55, which was enacted but never proclaimed into force. Bill C-55 can no longer be considered independent of the proposed amendments announced last December.
The combined effect of the Bill C-55 and the amendments announced on Dec. 8, 2006 (collectively, the “proposed amendments”) is to effect substantial changes in Canada’s insolvency regime. Some of the proposed amendments are as follows:
- new provisions in the BIA to deal with “transfers at undervalue,”
- broad provisions in both the CCAA and the BIA for a charge to cover fees of insolvency professionals and their advisors,
- the implementation of full receivership powers under the BIA and the concurrent restriction on the power of interim receivers,
- additional provisions under the CCAA to allow aircraft owners to repossess leased aircraft if ongoing obligations are not met,
- the ability under the CCAA to designate “critical suppliers,”
- codification in the BIA and CCAA of “interim financing,” with restrictions on how, and for what period, such financing may be permitted, and
- the adoption in principle of the UNCITRAL Model Law.
A number of these provisions merit further comment.
Transfers at Undervalue
The proposed amendments repeal the former provisions in the BIA dealing with settlements and reviewable transactions. Instead, the proposed amendments include provisions dealing with “transfers at undervalue,” which means the disposition of property or the provision of services for no consideration or for consideration that is conspicuously less than fair market value. If such a transfer at undervalue was made and several other criteria are satisfied, the bankruptcy trustee may apply for an order that the transaction is void or may seek judgment against the other party to the transaction for the difference between the consideration given the other party and fair market value of the property or services supplied.
Charge for Professional Fees
The proposed amendments to the BIA and CCAA codify the power of the court to grant charges over the insolvent company’s assets, including on a priority basis, to secure not only the costs of monitors, receiver-managers, interim receivers and trustees, but also the costs of their legal, financial and other experts. Further, a priority charge may also be granted to secure the costs of the legal, financial or other experts retained by any interested person if such expenses are necessary for the effective participation of that person in the insolvency proceeding.
Significantly, before a priority charge can be granted, notice must be given to all secured creditors who are likely to be affected. This provision directly addresses the current problem that courts often grant such priority charges in the absence of the creditors who will be directly affected.
National Receivers under the BIA
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, 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, a proposal or the enforcement of security.)
The proposed amendments to the BIA create a new “national” receiver that can be appointed by the court to take possession of, and deal with, an insolvent person’s property across Canada. Such receiver may be appointed if the court “considers it to be just or convenient to do so.” Unless the debtor consents or the court decides that the limitation period should be waived, a national receiver cannot be appointed until the 10-day standstill period under §244 of the BIA expires. The application must be brought in the judicial district where the debtor is located. At the same time, the proposed amendments narrow the powers of an interim receiver to essentially taking conservatory measures or disposing of perishable or rapidly depreciable property. Hopefully, the new provisions will prevent any further abuse of the existing interim receivership provisions of the BIA, while giving secured creditors the ability to have the court appoint a national receiver.
Aircraft Leases
The proposed amendments substantially amend §34 of the CCAA, which controls the ability of creditors to demand or accelerate payment after proceedings begin. The proposed amendments allow lessors to take possession of aircraft if (a) after the CCAA proceedings commence, the debtor (lessee) fails to protect or maintain the aircraft as required by the lease, (b) the debtor fails to cure existing lease defaults in the first 60 days of the CCAA proceeding, or (c) the debtor otherwise defaults after the first 60 days of the CCAA proceeding.
Critical Suppliers
The proposed amendments under the CCAA allow the court to declare that a supplier is critical if the goods or services supplied are “critical to the company’s continued operation.” Such critical supplier is required to continue providing goods or services on existing terms or on other terms that the court deems appropriate. The court may grant a priority charge over all or part of the debtor’s property to secure payment of the goods and services. The application to declare a supplier critical must be brought on notice to secured creditors who are likely to be affected.
Interim Funding
The practice of debtor-in-possession (DIP) funding has largely been codified in the proposed amendments to both the CCAA and the BIA. In the course of a proposal or a CCAA proceeding, the debtor will be allowed to apply to the court for interim funding, which may be given priority over existing creditors’ security. However, interim funding must provide new funding to the corporation and the application must be brought on notice to those secured creditors who are likely to be affected.
In making its decision whether to permit interim funding, the court is required to consider how the company’s affairs are likely to be managed, whether management has the confidence of major creditors, whether the interim funding would enhance the prospects for a successful restructuring, and whether the funding would materially prejudice any creditor. These proposed provisions will largely resolve the existing concerns with DIP financing that there were no fixed rules and that secured creditors were not given adequate opportunity to oppose such funding.
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 was 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. The Dec. 8, 2006, ways and means motion makes only minor amendments to the Canadian adoption of the Model Law by, for example, including a provision allowing the court to refuse to grant an order if doing so would be contrary to public policy. Canada’s approach to the Model Law still 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, and will continue, to recognize and offer assistance with respect to foreign insolvency proceedings.
Next Steps
Since the time that the ways and means motion was announced on Dec. 8, 2006, no formal bill has yet been tabled in Parliament for debate. As such, legislative reform remains stalled. Since Canada continues to be governed by a minority government, there could well be another national election this year. If such an election is called, the amendments will be deferred indefinitely.