On September 18, 2009, the Federal Government proclaimed into force the remaining amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). (A few provisions which are rendered moot, presumably deemed unnecessary or are amendments intended to coordinate the inter-governmental flow of information have not been proclaimed into force.) Some of the key changes to the BIA and the CCAA which we anticipate will considerably impact current Canadian insolvency practice are discussed below. In particular, the flexibility previously enjoyed by CCAA debtors has been somewhat curtailed under the new CCAA regime. However, many of the changes simply codify what the courts have done in the past.

DIP and Other Court-Ordered Charges

The new amendments provide the court with statutory authority to order charges in favour of bankruptcy professionals (including trustees, monitors, any of their financial or legal advisors and any of the debtor’s financial or legal advisors), debtor in possession (DIP) lenders, and directors and officers. Such charges may be granted over all or part of the debtor’s property and may rank in priority to existing secured creditors. In each case, the application for the charge must be made on notice to secured creditors who are likely to be affected by the charge.

While courts have ordered these types of charges in the past, the new amendments place statutory restrictions on the availability of such charges. For example, a DIP lender’s charge may only secure post-filing obligations and may not impair the rights of a pre-existing DIP lender without that lender’s consent. This change is significant, as it provides certainty to a potential DIP lender that its security will not be “primed” during the course of a proceeding. In addition, the new amendments set out a number of factors that the court must consider before granting a DIP lender’s charge, including whether the loan would enhance the prospects of a viable proposal, compromise or arrangement; whether any creditor would be prejudiced as a result of the charge; and the reasonableness of the company’s cash flows as reported by the trustee or monitor.

The new amendments also restrict the availability of a directors’ and officers’ (D&O) charge to post-filing obligations only. Further, the court will not order a D&O charge where the directors and officers could have obtained adequate indemnification insurance at a reasonable cost. Accordingly, directors and officers would be wise to confirm that any existing insurance will not expire before the commencement of proceedings; otherwise, they may expose themselves to pre-filing liabilities.

Critical Suppliers

The CCAA amendments now provide the court with the statutory authority to declare a person to be a critical supplier where the court is satisfied that the person is a supplier of goods or services to the debtor and the goods or services are critical to the debtor’s continued operations. Often, suppliers in CCAA proceedings will seek payment from the debtor for post-filing goods and services on a C.O.D. basis. The CCAA amendments will provide some relief to debtors, as the court may now obligate a critical supplier to supply goods and services to the debtor on terms consistent with the supply relationship or other terms that the court considers appropriate.

To protect such suppliers, the CCAA amendments require the court to grant a charge over all or part of the debtor’s property in favour of a critical supplier in an amount equal to the value of the goods and services supplied. This amendment brings the protection afforded to critical suppliers closer to that afforded under Chapter 11 of the US Bankruptcy Code wherein products and services supplied to the debtor post-filing constitute administrative claims with priority status. The courts have historically provided limited authorization for a CCAA debtor to pay critical suppliers on account of pre-filing obligations and it is unclear whether this practice will be restricted under the new CCAA regime.

Disclaimer, Resiliation and Assignment of Agreements

The BIA and CCAA now expressly provide that a debtor may disclaim or resiliate any pre-filing agreement, although the debtor must follow a statutory process. First, the debtor must obtain the trustee or the monitor’s consent to the disclaimer or resiliation, or a court order if the trustee or monitor does not consent. Then, the debtor must deliver notice to the contractual counterparty pursuant to a prescribed form under the new BIA and CCAA rules. Any such counterparty may apply to the court within 15 days for an order that the contract not be disclaimed or resiliated. The court is statutorily required to consider whether:

(1) the trustee or monitor approved the disclaimer or resiliation;

(2) the disclaimer or resiliation would enhance the prospects of a viable proposal, compromise or arrangement; and

(3) the disclaimer or resiliation would likely cause significant financial hardship to a contractual counterparty.

As per current practice, any counterparty who suffers a loss due to disclaimer or resiliation may file a claim pursuant to the claims process. The BIA and CCAA now also provide that the court can order the assignment of an agreement on application of the trustee or debtor. The court will need to be satisfied that all monetary obligations are current (other than those arising only by reason of the person’s insolvency or failure to perform a non-monetary obligation). These new provisions do not apply to eligible financial contracts, collective agreements, commercial leases where the debtor is a lessee, financing agreements where the debtor is a borrower and leases of real property or immovable property if the debtor is a lessor.

Collective Agreements

If, during the course of a BIA or CCAA proceeding, a debtor is unable to reach an agreement with a bargaining agent to amend the terms of a collective agreement, the debtor may now apply to the court (on five days notice to the bargaining agent) for an order to serve notice to bargain. The court will only make such an order if the debtor has made good faith efforts to bargain, the debtor would not otherwise be able to make a viable proposal, compromise or arrangement, and the failure to issue the order would result in irreparable harm to the debtor. The bargaining agent will have an unsecured claim for any concessions granted by the bargaining agent for the remaining term of the collective agreement. However, if the parties do not mutually agree to revise the collective agreement, the BIA and CCAA amendments expressly provide that the collective agreement remains in force.

Plan Approval

Until now, the CCAA has remained silent on the required elements of a plan of compromise or arrangement (Plan), other than mandating approval of the voting creditors by a majority in number representing two-thirds in value. The CCAA now provides that the court will not approve a Plan unless the Plan provides for payment of employee wages of up to $2,000 per employee and disbursements of traveling salespeople of up to $1,000 per employee for the period between filing and Plan sanction. In addition, the Plan must provide for payments of unpaid current service contributions and defined contribution plan contributions, unless the relevant parties have entered into an agreement, approved by the relevant pension regulator, about payment of those amounts.

Receivers, Trustees and Monitors

The BIA now provides for the appointment of one receiver in the locality of the debtor with Canada-wide jurisdiction, eliminating the need for multiple, costly proceedings in each jurisdiction where the debtor has assets. The court may order a charge over all or part of the debtor’s property in favour of the receiver, ranking ahead of secured creditors, on notice to those creditors likely to be affected by the charge. The new provisions limit the relief available to secured creditors.

Simultaneously, the BIA restricts the mandate of interim receivers. Pursuant to the amendments, an interim receiver is terminated effective the earliest of

(i) the taking of possession by a national receiver over property over which the interim receiver was appointed;

(ii) the taking of possession by a trustee over such property; or

(iii) 30 days after the date of the interim receiver’s appointment or after a period specified by the court, or the date of approval of the proposal.

Finally, trustees and monitors are now expressly protected from successor employee liability for current or former employees of the debtor or predecessor, or in respect of a pension plan for the benefit of those employees that exists before the trustee or monitor’s appointment.

Transfers at Undervalue

The transfers at undervalue provisions in the BIA now apply to arm’s length parties for the year prior to a bankruptcy. The CCAA now also includes a similar provision. During this period, if the debtor received substantially less than fair market value for the transfer, the debtor was insolvent at the time of transfer or was rendered insolvent by the transfer, and the debtor intended to defraud, defeat, or delay a creditor, then the court may declare the transfer void. As a result, caution should be exercised going forward in transactions between arm’s length parties. Where questions about the solvency of a counterparty exists, enhanced due diligence may be warranted.

Corporate Governance

A director may now face court-ordered removal from the board if the court is satisfied that the director is unreasonably impairing (or is likely to unreasonably impair) the possibility of a viable proposal, compromise or arrangement, or is acting (or is likely to act) inappropriately as a director in the circumstances. There are no criteria stipulated about the character or qualification of any replacement director, or the conditions under which such replacement may agree to serve.