Summary of Some of the Key Personal Insolvency Related Amendments to the Bankruptcy and Insolvency Act INTRODUCTION
The Insolvency Reform Act 2005 was introduced in the House of Commons on June 3, 2005 and received Royal Assent on November 25, 2005 and was intended to: (a) enact the Wage Earner Protection Program Act (the “WEPPA”) to establish a program – the Wage Earner Protection Program or the WEPP -- to provide compensation for remuneration owing to employees in the case of the bankruptcy or receivership of their employer; and (b) make significant amendments to the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”). The Insolvency Reform Act 2007 received Royal Assent on December 14, 2007. The purpose of the Insolvency Reform Act 2007 was to address issues that had been identified with respect to the amendments to be made by the Insolvency Reform Act 2005.
The amendments made by Insolvency Reform Act 2005 and the Insolvency Reform Act 2007 came into force in two stages. On July 7, 2008 the WEPPA and certain of the amendments to the BIA came into force and the remainder of the amendments to the BIA and the CCAA came into force on September 18, 2009. To correspond to the coming into force of the WEPPA and amendments to the BIA and the CCAA, regulations to the WEPPA and the CCAA were promulgated and the Bankruptcy and Insolvency Act General Rules (the “General Rules”) were amended.
A number of the amendments to the BIA made by the Insolvency Reform Act 2005 and the Insolvency Reform Act 2007 apply primarily, or exclusively, to individual debtors. Those amendments are summarized in this article.
AMENDMENTS IN FORCE 7 JULY 2008
- Property of the Bankrupt
On bankruptcy the property of the debtor passes to and vests in the bankruptcy trustee. Certain of that property will not, however, be available to be distributed among creditors. The amendments have clarified and expanded the property that will (and will not) be available for distribution among creditors.
- Tax Refunds
The BIA has been amended to provide that the property of the bankrupt that vests in the trustee includes any income tax refunds in respect of the fiscal or calendar year in which the bankruptcy takes place, except refunds that are not subject to the operation of the BIA or refunds that have been garnished under the Family Order and Agreements Enforcement Act (Canada).
- Property in RRSP/RIF
The BIA and the General Rules have been amended to provide that property in RRSPs, RRIFs or deferred profit sharing plan, as defined by section 147(1) of the Income Tax Act, will not be included in the property that is available for distribution to creditors, save and except for amounts contributed in the 12 months preceding the bankruptcy.
- Non-Dischargeable Debt – Obtaining Property or Services
Paragraph 178(1)(e) of the BIA has been amended to provide that a discharge order does not release the bankrupt from any debt or liability for obtaining property and services by false pretences or fraudulent misrepresentation other than a debt or liability that arises from an equity claim.
- Student Loan Debt
Paragraph 178(1)(g)(ii) of the BIA has been amended to reduce from ten down to seven years the period of time a student must wait after ceasing to be a student before a discharge order will release a debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students. This amendment will apply in respect of a debtor who: (a) was bankrupt on July 7, 2008 and applies for his or her discharge on or after July 7, 2008 or; (b) becomes bankrupt on or after July 7, 2008.
- “Hardship” Application
The amendments reduce from ten years to five years the period a bankrupt will have to wait after ceasing to be a student to make a “hardship” application to obtain a discharge of student loan debt. This amendment and applies to all debtors notwithstanding when the bankruptcy or the process that results in the bankruptcy was initiated.
- Consumer Proposals -- Agreements
The provisions of the BIA that prohibit the termination or amendment of agreements with a consumer debtor who has filed a consumer proposal – s. 66.34 – has been amended to specifically include security agreements in the scope of the stay. In the context of a consumer proposal proceeding, secured creditors will not be able to terminate or amend the security agreement, including a security agreement, or claim an accelerated payment from the consumer debtor on the basis only that the debtor is insolvent or has filed a consumer proposal.
AMENDMENTS IN FORCE 18 SEPTEMBER 2009
- Unrealizable Property
When the trustee has: (a) realized all the property of the debtor that is capable of being realized for the benefit of creditors; and (b) settled or determined the claims of all creditors, the trustee is required to prepare a final statement of receipts and disbursements and a dividend sheet and, subject to the procedural requirements of the BIA, make a final distribution to creditors and be discharged as trustee of the bankruptcy estate. Subsection 40(1) of the BIA has been amended to require that the bankruptcy trustee return the property that is: (a) listed in the bankrupt’s statement of affairs; or (b) has been otherwise disclosed to the trustee before the bankrupt’s discharge, and that is found by the trustee to be incapable of realization.
- Automatic Discharges
Prior to the amendments coming into force, unless the Superintendent of Bankruptcy, the bankruptcy trustee or a creditor opposed, first-time bankrupts were entitled to receive an automatic discharge from bankruptcy nine months after the bankruptcy, provided that the bankrupt attended the required debt counselling.
The current amendments have resulted in various changes to the provisions of the BIA respecting the automatic discharge of bankrupts, including automatic discharges for second-time bankrupts and lengthening the automatic discharge period where the debtor has surplus income.
- Concentration of Debt – Taxed Debtor
An individual bankrupt that has personal tax debt in excess of $200,000 that represents more than 75 per cent of the total proven claims asserted by his or her creditors (a “Tax Debtor”), will not be eligible for an automatic discharge and will have to wait a minimum period prior to applying to be discharged. The minimum time that a first or second time bankrupt who is a Tax Debtor will have to wait prior to applying for a discharge from bankruptcy correspond to the periods after which a bankrupt that is a not a Tax Debtor would be entitled to receive an automatic discharge.
- First-time Bankrupts
A first-time bankrupt who is not a Tax Debtor will, provided he or she attends counselling, receive an automatic discharge nine months after the date of the bankruptcy unless: (a) an opposition to discharge is filed; or (b) the bankrupt is required to contribute surplus income. A first-time bankrupt who is required to contribute surplus income will, assuming he or she attends counselling, receive an automatic discharge 21 months after the date of the bankruptcy unless an opposition to discharge is filed. There is no minimum threshold on the amount of surplus income that the bankrupt must be required to pay in order to trigger the requirement that the bankrupt wait 21 months to be automatically discharged.
- Second-time Bankrupts
Automatic discharges will also be available to second-time bankrupts. A second-time bankrupt who is not a Tax Debtor will, provided he or she attends counselling, receive an automatic discharge 24 months after the date of the bankruptcy unless: (a) an opposition to discharge is filed; or (b) the bankrupt is required to contribute surplus income. A second-time bankrupt who is required to contribute surplus income will, assuming he or she attend counselling, receive an automatic discharge 36 months after the date of the bankruptcy unless an opposition to discharge is filed. If the bankrupt is required to pay any amount of surplus income, even $1, the bankrupt must wait 36 months to be automatically discharged.
- Tax Debtors
Aside from the fact that a Tax Debtor will not be eligible for an automatic discharge, the BIA will be amended to add further provisions that deal with the discharge of Tax Debtors.
- Minimum Period in Bankruptcy
A Tax Debtor will be required to wait a minimum period of time prior to applying for a discharge. The period of time that a first- or second- time Tax Debtor will have to wait to apply to be discharged corresponds to the period after which the debtor would be automatically discharged from bankruptcy were the debtor not a Tax Debtor. In the case of a Tax Debtor that has been bankrupt more than twice, the minimum period that the tax debtor will have to wait to apply for a discharge is 36 months.
The jurisdiction of the court in connection with the discharge of a Tax Debtor parallels the jurisdiction of the court in connection with the discharge of a debtor in respect of which any of the factors in s. 173 of the BIA have been established. On a discharge application in respect of a Tax Debtor the court may: (a) refuse the discharge; (b) suspend the discharge for any period that the court thinks proper; or (c) require the bankrupt, as a condition of his or her discharge, to perform any acts, pay any moneys, consent to any judgments or comply with any other terms that the court may direct. If the court suspends the Tax Debtor’s discharge, the court is required to order that the Tax Debtor file income and expense statements with the trustee each month and file all required income tax returns.
In making a decision with respect to the discharge of a Tax Debtor the court is required to take into account: (a) the circumstances of the Tax Debtor at the time the income tax debt was incurred; (b) the efforts made by the Tax Debtor to pay the income tax debt; (c) whether the Tax Debtor made payment in respect of debts other than the income tax debt; and (d) the Tax Debtor’s future financial prospects. The BIA does not specify any criteria that must be considered by the court when considering a discharge application in respect of a debtor other than a Tax Debtor.
- Termination of Agreements - Individual Bankrupts
The BIA prohibits a party to an agreement, including a security agreement, with an individual bankrupt from exercising rights to terminate the agreement, amend the agreement, claim accelerated payment under the agreement or claim forfeiture of the terms under the agreement by reason only of bankruptcy or insolvency and, in the case of leases, on the basis of the fact that rent was not paid in respect of any period prior to the bankruptcy.
Public utilities are prohibited from discontinuing service to an individual bankrupt on the basis of the individual’s bankruptcy or insolvency or on the basis that amounts are owing for services rendered or material provided prior to the bankruptcy.
Subsection 84.2(1) through (3) override any agreement to the contrary, but do not prevent a person from requiring payments in cash for goods, services or the use of leased property provided after the bankruptcy or require anyone to advance credit to the bankrupt. The court has the jurisdiction to exempt a person or public utility from the application of s. 84.2 or limit the application of the subsections where the person or public utility satisfies the court that the limitation imposed by the application of the section will likely cause the person “significant financial hardship”.
- Avoidance Transactions/Augmentation of the Estate
Significant amendments have been made to the provisions of the BIA that provide for transactions entered into by the debtor to be challenged for the benefit of creditors.
- Repeal of Settlement and Reviewable Transactions
Effective September 18, 2009, the provisions of the BIA that dealt with settlements and reviewable transactions and have been repealed and new provisions that provide for “transfers at undervalue” to be challenged have been enacted to replace these provisions.
- Transfers at Undervalue
A new section has been added to the BIA that deals with “transfers at undervalue”. “Transfer at undervalue” is defined to mean a disposition of property or services where no consideration is received by the debtor or where the consideration received by the debtor is “conspicuously” less than the fair market value of the consideration given by the debtor. The provisions applies where the consideration given by the debtor is money, property or services so will apply where the debtor pays too much for what is received from the other party to the transaction or receives too little for what is provided.
Whether a remedy will be available in respect of a transfer at undervalue depends on whether or not the other party to the transaction dealt with the debtor at arm’s length. In the case of an arm’s length transfer at undervalue, a remedy will be available where: (a) the transaction occurred up to one year prior to the initial bankruptcy event; (b) the debtor was insolvent at the time the transaction took place (or was rendered insolvent by the transaction); and (c) the debtor intended to defeat its creditors by entering into the transaction. In the case, on the other hand, of a non-arm’s length transaction, a remedy will be available where: (a) the transaction occurred in the period beginning one year prior to the initial bankruptcy and ending on the date of bankruptcy, regardless of the debtor’s financial state or the intention underlying the transaction; or (b) the transaction occurred up to five years prior to the initial bankruptcy event and the debtor: (i) was insolvent at the time the transaction took place (or rendered insolvent by the transaction); or (ii) intended to defeat its creditors. A person who is related to the debtor as determined in accordance with s. 4 of the BIA is deemed, in the absence of evidence to the contrary, to deal with the debtor not at arm’s length for the purposes of s. 96(1)(b). It is a question of fact whether a person who is not related to the debtor dealt with the debtor at arm’s length and the onus would be on the trustee to establish that the person did not deal at arm’s length with the debtor for the purposes of attacking a transaction at undervalue.
Where the trustee establishes that there is a transfer at undervalue that was entered into in circumstances where a remedy is available, the court may – but is not required to – declare that the transaction is void as against the trustee; and the court may, if it declares the transaction void, grant a judgment against the other party to the transaction and any other person privy to the transaction for the difference between the actual consideration given or received and the fair market value of the property or services transferred or received. For the purposes of awarding damages, a “person who is privy” is defined as a person who: (a) is not dealing at arm’s length with a party to the transfer; and (b) by reason of the transfer, directly or indirectly receives a benefit or causes a benefit to be received by another person.
The section of the BIA respecting preferences – s. 95 – has been restructured to clarify the different tests to be applied vis a vis transactions with arm’s length and non-arm’s length creditors.
In the case of arm’s length creditors, a transaction in favour of that creditor will be attackable where it is entered into in the three months prior to the date of the initial bankruptcy event or during the period between the initial bankruptcy event and the date of bankruptcy. The trustee will have to establish that the transaction was undertaken with a view to giving the creditor a preference. Where, however, the transaction has the effect of preferring the arm’s length creditor, a rebuttable presumption will arise that the transaction was undertaken with a view to preferring the creditor. This presumption does not apply in respect of certain specified transactions, payments in connection with financial collateral in accordance with the provisions of an eligible financial contract or “EFC”, for example.
Where a creditor does not deal at arm’s length with the debtor, a transaction in favour of that creditor will be attackable where it is entered into in the 12 months prior to the date of the initial bankruptcy event or during the period between the initial bankruptcy event and the date of bankruptcy. The trustee will have to establish only that the transaction had the effect of giving the creditor a preference – the intention underlying the transaction will be irrelevant.
The transactions caught by s. 95 have been expanded to include the provision of services made by the debtor.
- Consumer Proposals
Consumer proposals were introduced to the BIA with the objective that debtors having a relatively low amount of unsecured debt would have access to an inexpensive and expedited procedure to make a proposal to their creditors and that the creditors would not be required to undertake an expensive and prolonged review of whether or not they accepted what was being proposed.
- Monetary Limit
The amendments have increased the monetary limit for consumer proposals from $75,000 to $250,000, which limit may be increased or decreased by regulation. As a result, a individual debtor whose aggregate debtors, excluding any debts secured by the individual’s principal resident, are not more than $250,000 may file a consumer proposal. This amendment will greatly expand the availability of consumer proposals.
- Statement of Affairs
A statement of affairs will have to be filed with the official receiver by the administrator of a consumer proposal.
- Deemed Approval of Consumer Proposal
Where no requirement to call a meeting of creditors to consider a consumer proposal arises the consumer proposal is deemed to have been accepted. The requirement to call a meeting of creditors arises where: (a) the official receiver directs; or (b) at the expiration of the 45 day period following the filing of the consumer proposal, creditors having 25% in value of the proven claims have requested a meeting. If a meeting of creditors is called, the consumer proposal is approved by an ordinary resolution of the creditors, voting as a single class.
- Revival after Automatic Annulment
Subsection 66.31(1) provides for the automatic annulment of a consumer proposal: (a) in the case when payments under the proposal are to be made monthly or more frequently, on the day on which the consumer debtor is in default for an amount that is equal to or more than the amount of three payments; or (b) in the case when payments under the consumer proposal are to be made less frequently than monthly, on the day that is three months after the day on which the consumer debtor is in default in respect of any payment. The consumer debtor can avoid the automatic annulment only by: (a) filing an amended consumer proposal prior to the automatic annulment; or (b) obtained a court order prior to the automatic annulment. The court does not have jurisdiction to waive the deemed bankruptcy that arises where a consumer proposal is automatically annulled. The practice that had developed was to allow the consumer debtor leave to file another consumer proposal to complete the annulled consumer proposal.
The BIA has been amended to permit the reinstatement after an automatic annulment of a consumer proposal made by a consumer debtor that is not a bankrupt. The procedure to revive a consumer proposal that has been automatically annulled will permit the administrator of a consumer proposal to send notice to the official receiver and creditors within 30 days of the deemed annulment, giving them 60 days to object to the revival, failing which the proposal is automatically revived. In addition, an administrator is able to apply, at any time, to the court on notice to the official receiver and creditors to revive a consumer proposal that has been deemed annulled, and the court will have the jurisdiction to revive the proposal on any terms it considers appropriate.
- Compromise of Non-Dischargeable Debts
The BIA has been amended to specifically provide that a consumer proposal does not release a consumer debtor from debts and liabilities referred to in s. 178 of the BIA unless the proposal explicitly provides for the particular debt or liability to be compromised and the creditor votes in favour of the proposal.
Where a consumer proposal is filed, the administrator is required to provide counselling to the consumer debtor. The BIA will be amended to clarify that the consumer debtor must attend counselling as a condition of the issuance of a certificate of full performance of his or her consumer proposal.
- Retroactive Bankruptcy
The section of the BIA that made the bankruptcy of an individual who filed an assignment before that individual’s consumer proposal was approved retroactive has been repealed.
- Bankruptcy Stay of Proceedings
The BIA has been amended to specify that the stay of proceedings that prevents creditors from commencing (or continuing) proceedings to recover a debt provable in bankruptcy ceases to apply when the bankruptcy trustee is discharged – that the stay of proceedings is linked to the discharge of the trustee and not to the discharge of the bankrupt. This represents a clarification as to when the stay of proceedings resulting from the application of s. 69.3(1) expires rather than an amendment. While s. 69.3(1) has also been amended to remove the reference to when the stay of proceedings expires, prior to being amended, s. 69.3(1) provided that the stay of proceedings applicable in a bankruptcy applied only until the bankruptcy trustee was discharged.
- Surplus Income
- Determination of Surplus Income
The amendments to the BIA expand and clarify the provisions of the BIA that deal with a bankrupt’s obligation to pay surplus income to the estate. The amended provisions will include definitions for “surplus income” and “total income”, and will clarify the procedure for determining whether the bankrupt has surplus income and what portion of that surplus income must be paid over to the estate.
- Payment of Surplus Income
The BIA has also been amended to clarify that where a debtor is entitled to an automatic discharge, the bankrupt’s obligation to make surplus income payments to the trustee will cease on the date the bankrupt is entitled to an automatic discharge, notwithstanding that the discharge might be opposed and the automatic discharge delayed as a result. The court will have the jurisdiction to order that the bankrupt pay money to the estate. Prior to this amendment, the BIA was unclear as to whether a bankrupt who is entitled to an automatic discharge is required to make surplus income payments up until the date of his or her actual discharge, and the practice appears to be inconsistent.
- 170 Report
Section 170 of the BIA requires that the bankruptcy trustee prepare a report (a “170 Report”) for use in connection with the debtor’s discharge. Subsection 170(1) has been amended to provide that the 170 Report is to be delivered in prescribed circumstances and at prescribed times. The General Rules were also amended, effective September 18, 2009, to prescribe the circumstances and the timing for the delivery of the section 170 Report.
- Where the 170 Report is to be Prepared
Subsection 121.1(1) of the General Rules require that the bankruptcy trustee prepare a report where: (a) the bankrupt has surplus income; (b) an opposition to the discharge of the bankrupt has been made; (c) the bankrupt has been bankrupt on a previous occasion under the laws of Canada or any prescribed jurisdiction; or (d) a court hearing of the discharge is required.
- When the 170 Report must be Delivered
In terms of when the 170 Report must be delivered, General Rules provide for the dleivery of the report. Click here to view the table demonstrating this.
- Contents of the 170 Report
The provisions of the BIA: (a) requiring that a bankruptcy trustee include a recommendation in the 170 Report with respect to whether a bankrupt should be discharged; (b) establishing the factors the trustee is required to consider in making its recommendation; and (c) deeming a recommendation that the debtor be discharged subject to conditions to be an opposition to the debtor’s discharge, have all been repealed.
- Mediation of Conditions of Discharge
The circumstances in which a mediation of the conditions of a debtor’s discharge from bankruptcy may take place have been amended.
Prior to being amended, the BIA contemplated that the conditions of a debtor’s discharge from bankruptcy: (a) could be mediated at the option of the debtor where the debtor disputed the trustee’s recommendation with respect to discharge conditions; and (b) would be mediated where the trustee or a creditor opposed the discharge solely on the basis that the bankrupt failed to comply with a requirement to pay surplus income or could have made a viable proposal. Now, the conditions of a bankrupt’s discharge will be mediated where the trustee or a creditor opposes the discharge solely on the basis that the bankrupt failed to comply with a requirement to pay surplus income or could have made a viable proposal. The provision of the BIA that required the trustee to make a recommendation in the 170 Report as to the conditions of the debtor’s discharge has been repealed and, correspondingly, the ability of the bankrupt to request that the conditions of his or her discharge be mediated has been removed.
- Summary Administration
Subsection 49(6) of the BIA, as modified by s. 130 of the General Rules, provides that if the realizable assets of an individual bankrupt, after deducting the claims of secured creditors, do not exceed $15,000, the provisions of the BIA relating to summary administration apply. Amendments have been made to these provisions.
- Sale of Property to Related Person
Subsection 30(4) requires that a bankruptcy trustee obtain authorization from the court prior to selling property of the bankrupt to a person that is related to the bankrupt. In a summary administration bankruptcy, s. 30(4) will apply only where the creditors determine that court authorization ought to be obtained.
- Agreement to pay Fees and Disbursements – First-Time Bankrupt
A new section – s. 156.1 – has been added to the BIA to allow an individual first-time bankrupt who is not required to make surplus income payments to enter into an agreement with a bankruptcy trustee to pay the trustee’s fees and disbursements up to a prescribed amount over a period that ends no later than 12 months after the bankrupt’s discharge. The agreement will be enforceable against the debtor notwithstanding his or her discharge. The General Rules provide that the amount required to be paid must not be more that $1,800 and that, subject to the priorities set forth in s. 136 of the BIA, funds from the realization of the debtor’s property shall be used to satisfy amounts payable to the trustee under the agreement. The General Rules also require that the trustee provide a copy of the agreement to the Superintendent of Bankruptcy.