Canada: Parliament Passes Amendments to Insolvency Legislation

Last Updated: January 4 2006

Bill C-55 Awaits Proclamation and Possible Changes

On November 25, federal legislation was passed that, when proclaimed into force, will make significant amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), and create a new Wage Earner Protection Program Act. The legislation will have a significant impact on bankruptcies, receiverships, proposals and restructurings, particularly by making certain income trusts subject to the BIA and CCAA, enacting employee pension and wage protection, and authorizing some existing practices in commercial insolvencies. With a federal election about to be called, the bill was expedited through Parliament but the date on which the bill will be proclaimed into force has yet to be determined. In an unusual move, the government has committed, at the request of the Standing Senate Committee on Banking, Trade and Commerce (Senate Committee), not to have the legislation proclaimed into force before June 30, 2006. This will allow time for the Senate Committee to review the bill and for Industry Canada and stakeholders to provide input. It is thus expected that changes will be made to Bill C-55 before it is proclaimed, but the scope of these changes is not known at this time.

Highlights of the BIA and CCAA Amendments

Some of the significant amendments that the bill will make to the BIA and CCAA are described below:

  • Income trusts. Publicly traded income trusts with assets in Canada will be subject to the BIA and the CCAA in the same manner as corporations.
  • Superpriority charge for wages and vacation pay. A near superpriority charge will exist over the debtor’s current assets to a maximum of $2,000 for each employee who is owed wages and vacation pay for the six-month period before the employer’s bankruptcy or receivership. The court will be prohibited from approving a proposal or plan that does not provide for payment to employees of these amounts.
  • Charge for pension contributions. A near superpriority charge will exist over all the assets of the debtor in a receivership or bankruptcy for any unremitted employee pension contributions and certain unpaid employer contributions. The court will be prohibited from approving a proposal or restructuring plan that does not provide for payment of these amounts.
  • Termination of collective agreements. The amendments will make it clear that collective agreements cannot be unilaterally terminated by debtors in BIA proposals or CCAA proceedings. However, if a debtor and the bargaining agent cannot reach a voluntary agreement to revise the collective agreement, the debtor will be able to bring a motion to the court to seek authorization to serve a notice to bargain. The court may grant the order if it is satisfied that the reorganization is not viable under the terms of the current collective agreement, the insolvent person has made good faith efforts to renegotiate and failure to issue the order is likely to cause irreparable damage to the debtor.
  • Disclaimer and Termination of Agreements. Recognizing existing CCAA practice, the BIA and CCAA will permit a debtor to disclaim any agreement during a reorganization if it gives 30 days’ notice of its intention to the other party(ies) to the contract. However, the right to disclaim will not apply in respect of an eligible financial contract, a real property lease in which the debtor is the lessor, a collective agreement or a financing agreement in which the debtor is the borrower. A disclaimer will not affect a non-debtor party’s rights to use intellectual property if use has been granted in an agreement and the non-debtor party continues to perform its obligations. The CCAA will be amended to prevent the non-debtor party to an agreement from terminating or amending an agreement solely on the basis that a CCAA order has been made in respect of the debtor. Such a provision already exists in the BIA.
  • Assignment of Agreements. A reorganizing company or a bankruptcy trustee will be permitted to apply to the court for orders assigning agreements, subject to some exceptions, including eligible financial contracts, collective agreements and other agreements that are by their nature not assignable. Another BIA exception will be commercial real property leases in which the debtor is the tenant. In deciding whether to make an assignment, the court must consider, among other things, whether the person to whom the rights and obligations are to be assigned would be able to perform the obligations and whether it would be appropriate to assign the rights and obligations to that person. The court may not make the assignment if it is satisfied that the debtor is in default under the agreement.
  • Director removal and indemnification. The BIA and CCAA will allow the court to remove a director who is found to be unreasonably impairing the proposal or plan, or acting inappropriately. The amendments will also recognize existing CCAA practice by permitting the court to grant a superpriority charge in favour of directors and officers of restructuring companies for liabilities that may be incurred after the commencement of proceedings if the court finds that adequate D&O insurance cannot be obtained at a reasonable cost.
  • Debtor-in-possession (DIP) financing. Recognizing existing CCAA practice, the BIA and CCAA will allow courts to grant a lender security over a reorganizing debtor’s assets for required borrowings during the restructuring period. The court will have discretion to determine how much the debtor can borrow and the terms of the debtor-in-possession financing, and will be able to specify that the charge for the financing ranks in priority to the claims of any secured creditor.
  • Critical suppliers. The CCAA will permit the court to make an order declaring a person to be a "critical supplier" if the court is satisfied that the person is supplying goods or services that are critical to the debtor’s continued operations. If the court makes such a declaration, it may make an order requiring that the goods or services be supplied by the person on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate. The critical supplier will be granted security over the debtor’s assets in an amount equal to the value of the goods or services supplied under the order. The court will be able to specify that the security ranks in priority over the claim of any secured creditor of the debtor.
  • Regulators in a restructuring. The CCAA will provide that regulators are stayed from actions only in their capacity as creditors and not in their capacity as regulators.
  • Cross-border insolvencies. The cross-border insolvency provisions of the BIA and CCAA will be replaced by a modified version of the UNCITRAL Model Law on Cross-Border Insolvency.
  • RRSPs and RRIFs. For personal bankruptcies, the amendments will allow RRSP and RRIF contributions made within the 12 months prior to bankruptcy (or longer if a court so determines) to be seized by the trustee in a bankruptcy and to be divisible among creditors of the debtor. While it is not clear from the amendments, partly because they contemplate additional conditions and limitations in future regulations that may be passed, the amendments appear to designate all RRSPs and RRIFs as exempt property and thus not divisible among a personal bankrupt’s creditors. If this were the case, this would be a major legislative change since under existing law, only the interest of a bankrupt in an RRSP with an insurance element and with qualifying designated beneficiaries is exempt from seizure by the trustee.

Additional amendments to the BIA and CCAA deal with the powers and responsibilities of interim receivers and monitors, successor employer liability, the Office of the Superintendent of Bankruptcy and charges for advisers and professionals in restructurings. There are also provisions dealing with equitable subordination, transfers at undervalue and sales of assets, among other matters.

The amendments will be of vital importance to lenders that rely on a margin formula that has a carve-out for potential priority payments.

Wage Earner Protection Program

A new Wage Earner Protection Program (WEPP), funded by the Consolidated Revenue Fund, will be created for terminated employees who have been employed for three months or more before their employer’s bankruptcy or receivership. Employees will be able to apply under the WEPP to receive unpaid wages and vacation pay earned in the six months before the bankruptcy or receivership. The maximum amount for which an employee could apply is the greater of $3,000 and four times the employee’s maximum weekly insurable earnings under the Employment Insurance Act. The WEPP will not be available to management, officers, directors or employees with a controlling interest and will not cover severance or termination pay. If a payment is made to an employee under the WEPP, the Crown will be subrogated to any rights the employee has against the employer and a director of a corporate employer.

The delayed proclamation of Bill C-55 may provide an opportunity for further changes to the legislation to deal with some of the concerns that have been raised by interested stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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