On June 22, 2007, the federal Budget Implementation Act, 2007 (formerly Bill C-52) received royal assent. Most of the Act came into force on that date, including nearly all of Part 9, which makes important amendments to the eligible financial contract provisions of the Bankruptcy and Insolvency Act (BIA), the Companies' Creditors Arrangement Act (CCAA), the Winding-up and Restructuring Act (WURA), the Canada Deposit Insurance Corporation Act (CDIC Act) and the Payment Clearing and Settlement Act (PCSA). The Part 9 amendments, discussed in the the Structured Finance Update (April 2007), provide long-sought protection against stays with respect to actions to deal with or realize on "financial collateral" - including cash, cash equivalents, securities, securities accounts, futures and other similar items - for obligations under EFCs.
The amendments specifically prevent courts from subordinating a security interest against financial collateral for an EFC - thus there no longer need be any concern about the possibility that a security priming order (such as in a DIP financing, or for directors' indemnities) could affect such collateral. In addition, the preference provision in the BIA has been amended to clarify that no presumption of a preference arises for collateral provided on a mark-to-market basis for EFCs.
Keeping the EFC definition current will now be easier
The amendments have also transferred the definition of EFCs to the Regulations. Going forward, this will make it much easier to ensure that the definition reflects international market practice as it develops. While the new regulation is not expected to be finalized until November, it is believed that it will significantly expand upon the current EFC definition. The government is expected to publish a draft of the regulation well before then. In the meantime, the current EFC definition remains in force (the EFC definition sections in the insolvency statutes mentioned above are amended by Bill C-52 to simply direct the reader to the new definition in the regulations - these amended definitions are the only element of Part 9 scheduled to come into force at a later date, i.e. at the same time the new regulation is finalized).
Finally, the amendments have cured the CCAA netting problem created by amendments passed prior to the 2006 federal election as part of the Wage Earner Protection Program Act (Bill C-55) but not yet brought into force. These amendments provided for an automatic stay of any termination, acceleration or forfeiture under an agreement on the commencement of a CCAA proceeding, without making an exception for EFCs. Once Bill C-55 does come into force, the problematic provision will be automatically repealed. Of equal concern was a second proposed provision allowing the court to make any order it saw fit, without exempting EFCs. This would obviously have introduced unwarranted uncertainties into financial contracts. The new Act makes it clear that no order can be made under the CCAA that has the effect of interfering with the close-out netting rights.
The Bill C-52 provisions must be considered in conjunction with Bill C-62, which received first reading in the Senate on June 14 and contains amendments to the Wage Earner Protection Program Act sections that were never proclaimed in force. Among the Bill C-62 provisions are several that are virtually identical to the Bill C-52 amendments just discussed - a result of the minority government's uncertainty about the likelihood that either one of the bills might not pass before the summer recess. A complex "co-ordination" scheme is included as s. 112 of Bill C-62, which effectively deletes the duplicate amendments contained from that legislation in the event that Bill C-52 comes into force before Bill C-62. As this has in fact happened, the relevant sections of Bill C-62 will be stillborn if and when that bill - which contains other significant amendments to Canadian insolvency legislation - receives final approval from the Senate.