Late on November 4, 2003, the Standing Senate Committee on Banking, Trade and Commerce released a report calling for substantial reform of the federal insolvency statutes. Because of concerns about timing, the Committee rushed to complete its report and was unable to address certain issues. However, it is ambitious and a very substantial body of work, some 275 pages in length with 53 specific recommendations.
With respect to commercial insolvencies, the Committee adopted key aspects of the basic approach advocated by the Joint Task Force ("JTF") of the leading professional organizations. In particular, the Committee advocated an agenda for reform that is broader than that initially identified by Industry Canada, and adopted a standards based approach for reorganization proceedings rather than the intensely rule oriented approach of U.S. insolvency laws. Twenty-two of the Committee’s recommendations apply specifically to commercial insolvencies. Some key recommendations are summarized below.
Wage earner protection. Claims for unpaid wages and vacation payable to an amount not to exceed the lesser of $2,000 or one pay period should be given super priority over secured claims to inventory and accounts receivable.
Suppliers 30-day claims. The right of unpaid suppliers to repossess goods supplied to bankrupt companies within the thirty-day period preceding the bankruptcy should be repealed.
Workers’ compensation board premiums. Following the initial release of the report, the Committee amended its recommendations to propose that Workers’ Compensation Board premiums be treated as preferred claims ranking in priority to unsecured claims in all insolvency proceedings.
Commentary: The recommendations with respect to wage earner protection and supplier claims will be controversial. However, the combined effect is likely to be positive for businesses that borrow on a margined basis against working capital assets. On a policy basis, it is easier to justify special protection for wage earners than for suppliers.
DIP financing. The Courts should be expressly authorized to grant super priority debtor-in-possession financing. The Committee recommended that in deciding whether to authorize such financings, the Courts should be required to consider seven factors outlined by the JTF.
Going concern sales. The Courts should expressly be given the authority to authorize going concern sales in the course of reorganization proceedings subject to certain factors identified by the JTF.
Collective bargaining agreements and other executory contracts. Subject to Court approval, the debtor should be authorized to disclaim executory (on-going) contracts during a restructuring proceeding. This power would apply to collective bargaining agreements, but with certain special parameters including a requirement that the debtor must have bargained with the union in good faith after the filing. In addition, the Courts should be able to authorize the assignment of executory contracts in connection with either going-concern sales or in liquidations, subject to the assignee providing compensation for any pecuniary loss resulting from the debtor’s default.
Commentary: These key recommendations will put to rest many legal debates about the scope of the authority of the Courts in reorganization proceedings. They may encourage the development of a more liquid market for the provision of DIP loans in Canada. They confirm that from a policy prospective, a going-concern sale of the business is just as desirable an outcome as the reorganization of the existing owner of the business. They reflect the importance of contractual rights to modern businesses. Successful implementation of these basic provisions would be an important step in modernizing Canadian reorganization law.
Directors. Insolvency law should provide a generally applicable due diligence defence against personal liability for directors of insolvent corporations. In addition, the Courts should have the authority to remove directors in the course of reorganization proceedings if the governance structure is impairing a restructuring process.
Conflicts. The debtor’s auditors should not be permitted to act as a monitor during a CCAA proceeding, and monitors should not be entitled to become a trustee or receiver for a secured creditor in the event of a failed restructuring.
Successor employer liabilities. Insolvency practitioners should not be liable for employee related claims as successor employers.
Commentary: These provisions reflect an awareness that as powerful new tools are given to debtors, it becomes critical to ensure that those tools are used properly. Accordingly there is a need to encourage qualified directors to serve but also a need to ensure that there are appropriate checks and balances with respect to governance of the insolvent debtor.
Subject to certain safeguards, Canadian insolvency laws should incorporate the Uncitral Model Law for cross-border insolvencies.
Commentary: There may be considerable debate about this recommendation because of sovereignty concerns. The Committee was cognizant of Canada’s leading role in the development of the Model Law and stressed the importance of harmonizing laws with trading partners, particularly the United States.
Nineteen of the recommendations made by the Committee relate specifically to consumer insolvencies. Important recommendations were made with respect to easing the restrictions on the discharge of student loans through bankruptcy, enhancing the protection of family law claims in bankruptcy proceedings, exempting RRSPs and RESPs from seizure, and prohibiting the termination of contracts for basic services on account of bankruptcy. This last recommendation would require banks to maintain bank accounts for, and provide other basic banking services to, undischarged bankrupts.
The report is ambitious and makes numerous controversial and constructive recommendations. Undoubtedly certain stakeholders will oppose some of the recommendations, but the overall thrust of the report is to be welcomed. The next step is for Industry Canada to develop its own internal policy paper in response to the report. That policy paper is unlikely to be considered by Cabinet until after the expected spring election with the result that legislation will not be enacted before 2005.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2003 McMillan Binch LLP