Derivatives market participants will want to pay close attention to Industry Canada’s recent discussion paper regarding its review of the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA). Several of the matters on which the ministry is seeking input relate to eligible financial contracts (EFCs), including the existing EFC safe-harbour provisions in these Acts. The Discussion Paper makes note of the recommendations made by the Insolvency Institute of Canada’s Report of the Task Force on Derivatives and to a report by Dr. Janis Sarra (Examining the Insolvency Toolkit: Report of the Public Meetings on the Canadian Commercial Insolvency Law System). Submissions are due July 15. The Minister of Industry intends to table a report in Parliament in September. This report will then be referred to committee and may lead to amendments to the BIA and CCAA.
Several of the IIC recommendations would positively contribute to certainty regarding the enforceability of close-out and collateral enforcement rights. These include express safe-harbours in receivership proceedings and clear priority over statutory trust and lien claims for financial collateral for eligible financial contracts.
However, other IIC Report recommendations include removing the EFC safe-harbour from the debtor’s contract disclaimer power and power to assign contracts, banning walk-away clauses and restricting the EFC financial collateral protections to collateral under the “control” of the collateral receiver. The IIC recommendations are almost entirely proposed from the perspective of an insolvency practitioner and demonstrate certain misunderstandings of documentation and market practice, if not little or no understanding of the reasonable requirements of derivatives market participants. Some of the changes are likely acceptable in principle, but others would have a material and adverse impact upon Canadian market participants and on the ability of Canadian market participants to transact internationally. Input from derivatives industry experts on each of these matters will be critical to ensuring that the issues and the implications of change are fully understood by Industry Canada.
Another topic on which the Discussion Paper seeks input is empty voting and disclosure of economic interests that arise from the potential effect of credit default swaps. The concern is that a debtor that has purchased credit protection may have disincentives to support a workout or restructuring. The suggestion is that the court be permitted to consider the actual economic interests of the creditors when considering approval of a restructuring plan. Disclosure of the economic positions is also a matter for consideration.
The Sarra Report also recommends narrowing the EFC safe-harbours for certain types of new derivatives and the implications of that could be very significant.
Also, the industry could consider whether there are other matters not addressed in either the IIC Report or Sarra Report that could be addressed in revised legislation.
This opportunity to make submissions to Industry Canada on the insolvency legislation only comes along every 5 years, so don’t let it slip by.