Long-awaited amendments to Canada’s insolvency legislation came into force on September 18, 2009. The amendments materially reform both of Canada’s major insolvency statutes: the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”). To a considerable degree the amendments codify 15 years of case law developments, but with modifications that could prove to be material in the next few years.
Several elements of the overall reform package were proclaimed in force in July 2008, including the expansion of the exceptions from a stay of proceedings for certain derivative and financial contracts known as “eligible financial contracts” and the implementation of the Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment.
In addition, in 2008 employees received the benefit of government wage insurance, backstopped by a super-priority working capital lien against current assets, along with a new super-priority lien against all assets for current service pension contribution arrears, all within the bankruptcy or receivership context.
The following are some highlights of the amendments that came into force on September 18, 2009, from the perspective of various stakeholders:
- The Court now has express authority to approve debtor-in-possession financing (“DIP”) (subject to statutory guidelines) which may make it easier to obtain priming DIPs.
- Debtors are expressly authorized to pursue asset sales out of the ordinary course during a restructuring, resolving any lingering doubts as to their validity, particularly in the case of going-concern sales of a business.
- Claims of equity holders (including damage claims for breach of securities laws) are now expressly subordinated, which may further facilitate public company reorganizations.
- Unionized companies have lost the ability to threaten to use bankruptcy laws to terminate collective bargaining agreements, as unilateral termination of collective agreements is now prohibited.
- The codification of “executory contract” provisions (including the debtor’s power to assign and disclaim) ends substantial legal doubts about the Court’s powers to deal with executory contracts. However, the introduction of new procedures and restrictions on the use of this authority may prove to be material.
- Critical suppliers can now be subject to mandatory injunctions to supply (potentially without a subsisting ongoing supply contract), but with lien protection.
- Small business debtors (less than $5 million) have gained express access to the big case toolkit (e.g. DIPs, assets sales, executory contract provisions).
- Adoption of cross-border provisions based on the UNCITRAL model law should tend to preserve consistency with the U.S.
- The Court now has the express authority to remove obstructionist directors.
- The approval of restructuring plans are now expressly conditional on treatment of employees that mirrors the wage and pension protection provided to employees in receiverships and bankruptcies (as described above).
- Union contracts can only be changed through collective bargaining, although in certain situations the Court has authority to trigger an obligation to bargain in good faith.
- Trade creditors will receive enhanced protections for the price of goods supplied 30 days before a receivership or bankruptcy.
- Reorganization proceedings now contain fraudulent preference and conveyance type provisions which may give rise to more U.S. style litigation and litigation trusts for the benefit of unsecured creditors.
- There may be greater opportunities to form creditors’ committees funded by the debtor.
- The express authority of the Court to grant a variety of priming liens (DIP, securing critical suppliers, securing the monitor, directors and officers and other professionals) may make it harder for secured creditors to oppose or limit the scale of those charges.
- The introduction of enhanced protections for receivers against successor liabilities may reverse the chill on receiverships that followed the Supreme Court of Canada’s decision in TCT Logistics and provide a more practical option for enforcement by secured creditors.
- The limitations on DIPs introduced by the amendments makes it unclear whether “roll-up” DIPs, popular in cross-border proceedings, will be permitted going forward.
The implementation of the reforms will no doubt have a significant impact on the insolvency practice in Canada, particularly if the Courts decide to test the limits of the very broad discretionary powers mandated by the amendments. There are also numerous technical amendments which will undoubtedly give rise to disputes, litigation and, potentially, surprises.
For a more in-depth look at the amendments, please see John Archibald’s article entitled “The Impact of Recent Reforms to Canadian Insolvency Legislation”.