Canada’s insolvency and restructuring regime consists primarily of two separate statutes that have been substantially amended in recent years to align their restructuring provisions. Despite some similarities with its U.S. counterpart, the amended Canadian regime remains distinct.
Corporate restructurings in Canada are governed by either the Companies’ Creditors Arrangement Act (CCAA) or the proposal provisions of the Bankruptcy & Insolvency Act (BIA). Known as “Chapter 11 without rules,” the CCCA is only available to debtors with total debts of over $5 million. The statute provides tremendous flexibility to the supervising court and the debtor in conducting restructuring proceedings.
In contrast, the BIA provides a much more structured set of rules and regulations. Nonetheless, both statutes provide for a stay of creditors, the filing of a plan or proposal, and voting on the plan or proposal by affected creditors, followed by court approval. Recent amendments (as discussed below) more closely align the CCAA and BIA restructuring provisions.
Rights of Trustee in Bankruptcy and Secured Creditors
Liquidations are generally conducted under the bankruptcy provisions of the BIA (which is akin to Chapter 7 of the U.S. Bankruptcy Code). Upon bankruptcy, all of the assets of the bankrupt vest in a trustee in bankruptcy who is responsible for administering a claims process and for realizing upon the assets. The trustee’s rights are generally subject to the interests of secured creditors who can realize against secured assets by appointing a receiver (or receiver and manager) pursuant to the security agreement; however, typically, a secured creditor will seek court appointment of a receiver, either under the BIA or under provincial law in most provinces.
On November 25, 2005, the federal government passed An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, S.C. 2005, c. 47 (now referred to as Chapter 47, formerly Bill C-55). Chapter 47 was intended to provide greater protection for wage claims; facilitate the restructuring of insolvent but viable businesses; make the insolvency system fairer; improve its administration; and curb the potential for abuse.
It introduced substantial amendments to the BIA and the CCAA, including: the establishment of the Wage Earner Protection Program and provisions for the protection of collective agreements, wage and pension claim priorities, national receivers, executory contracts, interim financing, assets sales, duties of court-appointed officers, corporate governance and court-ordered charges. Chapter 47 also introduced provisions similar to the Chapter 15 amendments in the United States. It is highly likely that Chapter 47 will be substantially amended before it comes into effect so that a number of outstanding technical and implementation issues can be addressed.
On March 29, 2007, the federal government introduced Bill C-52. That Bill introduced substantial amendments to Chapter 47 and other insolvency laws which would strengthen the protection afforded to eligible financial contracts in insolvency proceedings. The federal Budget Implementation Act, 2007 (formerly Bill C-52) received Royal Assent on June 22, 2007. Most of the Act (including the eligible financial contract provisions) came into force on that date.
In a “cross-border” insolvency, Canadian courts generally encourage coordination among the various proceedings in all jurisdictions so that the restructuring or liquidation can proceed in a fair and orderly manner. Embodying certain essential features of the UNCITRAL Model Law on International Commercial Arbitration, Chapter 47 facilitates coordination in “cross-border” insolvencies.
Where a primary insolvency proceeding is taking place outside of Canada, a foreign representative can appear in a Canadian court and obtain recognition of the foreign court order(s), a stay of proceedings against the debtor or the debtor’s property in Canada and other appropriate relief. Canadian courts have also authorized numerous court-to-court protocols to facilitate cases with complicated cross-border aspects.
Despite aspects of harmonization, there are still many notable differences between insolvency and restructuring law in Canada and the United States. For instance, neither the CCAA nor the BIA authorizes a court to consolidate the assets or liabilities of different entities; however, Canadian courts have exercised their equitable authority under both statutes to consolidate the estates of related debtors.
In addition, while the doctrine of equitable subordination is an accepted and codified feature of the U.S. legal landscape, it may not be applicable in Canada. Also, there is currently no specific statutory authority for DIP financing in Canada; however, our courts have approved DIP lending arrangements in CCAA proceedings to facilitate the debtor’s survival while in the process of formulating a restructuring plan.