The bankruptcy and insolvency reforms passed by Parliament in 2005 and 2007 will at last come into force today, September 18th, 2009. While a small initial round of reforms dealing with employee wages were implemented in July 2008, today marks a more radical shift in Canadian insolvency law as the remaining amendments come into effect. The reforms will be applicable to any bankruptcy or insolvency proceedings started on or after today’s date. Key elements of the reforms will include:
Interim Financing, Administrative and D&O Charges
Super-priority charges are now expressly authorized in BIA and CCAA proceedings for the purpose of securing interim financing, indemnifying officers and directors, and paying the fees of legal and financial professionals involved in the restructuring. The new provisions are essentially a codification of existing legal practices but include notice requirements for secured creditors and, in some cases, clarify the factors which Courts must consider before granting a charge.
The Court in CCAA proceedings is now authorized to identify “critical suppliers” and require them to continue to supply goods or services to a debtor throughout the course of the restructuring. Critical suppliers may be protected by a super-priority charge over the debtor’s assets to ensure they are not exposed to undue risk.
Unpaid Wages and Pension Plan Amounts
Since July 2008, the employees of bankrupt companies or companies in receivership have been given a super-priority charge over the company’s assets of up to $2,000 for wage and vacation pay arrears. Furthermore, each employee can take advantage of the Wage Earners Protection Program Act, which provides for payment by the Federal government of up to $3,253 per worker (the equivalent of 4 EI payments) for unpaid wages, vacation pay arrears, severance and termination pay. As of today, a Court can only approve a CCAA plan if provision is made to satisfy unpaid wages and vacation pay arrears.
In addition, the July 2008 amendments created a statutory super-priority charge to secure payment of unpaid normal pension contributions (which excludes special payments or deficiency claims) in the context of bankruptcy or receivership. Effective as of today, in order for a Court to approve a BIA proposal or a CCAA plan provision must also be made to satisfy unpaid pension plan contributions.
The provisions protecting unpaid suppliers of goods to a debtor company have been rationalized to ensure that suppliers have time to submit a demand for recovery of any unpaid goods delivered within 30 days of the date of bankruptcy.
Assignment and Rejection of Contracts
The assignment and rejection of agreements in bankruptcy or insolvency proceedings is now expressly authorized, and timelines have been established to allow counterparties to raise a proper protest. Counterparties to rejected agreements will receive an unsecured charge against the debtor’s assets for the value of their loss.
Note that some agreements will not be eligible for assignment or disclaimer, including: eligible financial contracts and collective agreements. The disclaimer of financing agreements where the company is the borrower is prohibited.
It is now clear that collective agreements cannot be disclaimed in bankruptcy or insolvency proceedings. The Courts may order negotiation of a collective agreement under applicable labour legislation, however if no compromise is reached the agreement will remain in force. To the extent that the collective agreement is renegotiated, the bargaining agent will now have an unsecured claim against the debtor for the value of the concessions.
Generally, debtors in reorganization proceedings cannot sell assets out of the ordinary course of business. The new reforms provide that the Court may nevertheless authorize such a sale upon considering a number of enumerated factors, and ensuring that proper notice is given to affected creditors. Asset sales to relatedparties will be subject to additional scrutiny.
Interim and National Receivers
The reforms require that interim receivers must really be ‘interim’, stipulating fixed time periods for appointment and limiting the powers which can be granted to interim receivers. The reforms also introduce the prospect of appointing ‘national receivers’, with potentially broad powers.
Transfers at Undervalue
Today’s reforms will overhaul the remedy provisions of the BIA, eliminating settlements and reviewable transactions and replacing them with the concept of ‘transfers at undervalue’. Under the new regime, any transfer from the debtor to another party for consideration conspicuously below fair market value can be reviewed by the Court. The time period during which a transaction may be reviewed and the requirement to prove that the debtor intended the transaction to defeat creditors will vary depending on the relationship between the parties.
The regime for dealing with cross-border insolvencies has been revamped to more closely resemble the UNCITRAL model law and U.S. practices under Chapter 15 of the U.S. Bankruptcy Code.
The reforms also introduce a number of other changes to the bankruptcy and insolvency regime in Canada, including:
- Authorizing the Court to remove directors in CCAA proceedings;
- Providing that the BIA and CCAA apply to income trusts;
- Preventing “out-of-the-money” equity claimants from exercising veto rights over a plan of compromise or arrangement; and
- A host of other technical amendments to the language and structure of the legislation.