Canada: Advisory Panel Recommends Modernization Of Ontario's Corporate And Commercial Laws

Introduction

On July 9, 2015, the Ontario Ministry of Government and Consumer Services released a report entitled "Business Law Agenda: Priority Findings & Recommendations Report" (the "Report"), which it commissioned to obtain advice on priorities for reforming Ontario's business and commercial legislation and recommendations for how to modernize such laws and facilitate an efficient market and prosperous business climate in Ontario. In February 2015, the Ministry convened a panel of experts (the "Panel"), including practitioners and academics, to provide advice to the Minister of Government and Consumer Services on the priorities for reform.

The Panel's recommendations aim to

  1. establish a process to keep corporate and commercial law in Ontario current;
  2. position Ontario as a leading business jurisdiction;
  3. encourage and support innovation and investment, job creation and economic growth through greater certainty, clarity and efficiency in business legislation;
  4. modernize laws relating to secured lending and other commercial activity; and
  5. facilitate market activity and support regulatory frameworks that are responsive, flexible and adaptable to business needs.

Establish a process for keeping Ontario's corporate and commercial laws current

Currently, Ontario does not have any formal process to regularly review and "refresh" its corporate and commercial legislation. The Panel recommended that a formal process be established that would assist in making Ontario a "preeminent business jurisdiction, encourage innovation and creativity and facilitate ongoing engagement with stakeholders."1The Panel's rationale for this formal review process is that corporate and commercial laws must be responsive to the constantly changing needs of the business community and its consumers.

Position Ontario as a Leading Business Jurisdiction

The Panel noted that businesses have the ability to "shop" for the most attractive jurisdiction in which to incorporate and that it is imperative that Ontario seek to create an optimal regime that facilitates commercial transactions and provides certainty regarding the rights and remedies of corporations and their stakeholders.

To this end, the Panel recommended that Ontario's Business Corporations Act be reviewed and updated. The update should give priority to enabling electronic meetings; clarifying director and officer duties, liabilities and protections; increasing flexibility regarding the composition of boards of directors (including by way of the elimination of any director residency requirement, and allowing shareholders to vote against director nominees); and finding the best way for beneficial holders of shares to exercise the rights and remedies that are currently available only to registered shareholders.

Similarly, the Panel recommended that Ontario's Limited Partnerships Act be reviewed and updated. A priority for such review is the scope of liability for limited partners, and whether that scope should be narrowed in a similar manner to the regime in Manitoba so that limited partners are not unduly exposed to the risk of liabilities.

The Panel recommended that Ontario consider expanding the scope of businesses that may use limited liability partnerships (rather than restricting such partnerships to lawyers and accountants). The Panel further considered whether allowing for the formation of a "limited liability corporation" would be desirable, but concluded that it would be unnecessary if the availability of limited liability partnerships is expanded.

The Panel noted the popularity of "unlimited liability corporations" (ULCs) in the structuring of cross-border transactions. The formation of ULCs is currently possible in Nova Scotia, Alberta and British Columbia. The Panel recommended allowing this form of enterprise in Ontario in order to attract businesses seeking this structure.

Finally, the Panel observed that Ontario's Partnerships Act is outdated in many respects and lacks clarity with respect to several fundamental concepts. This ambiguity increases costs and uncertainty for businesses that are subject to the statute. Accordingly, the Panel recommended that the Partnerships Act be updated to bring certainty to these issues.

Support Greater Market Certainty and Confidence in Market Transactions

The Panel also made certain recommendations with respect to the Assignments and Preferences Act (Ontario) ("APA"), Fraudulent Conveyances Act (Ontario) ("FCA"), and Bulk Sales Act (Ontario) ("BSA"), including (a) the repeal of the APA and FCA and adoption of the Uniform Law Conference of Canada's Reviewable Transactions Act; and (b) the repeal of the BSA.

The APA and FCA are both provincial statutes that deal with the rights of creditors to set aside a transaction made by a debtor to a third party for the purpose of defeating, hindering, delaying or defrauding creditors. The APA also includes provisions against transfers by a debtor that result in an unjust preference of one creditor over other creditors.

The Panel noted, among other things, that conditions for recovery under both the APA and FCA were poorly defined and the statutory requirements were difficult to satisfy. The Panel also noted there was substantial overlap between provisions of the APA, FCA and the federal Bankruptcy and Insolvency Act (Canada). Accordingly, the Panel recommended the adoption of the Reviewable Transactions Act in order to provide a set of clear rules to enable parties to assess whether certain transactions would be vulnerable to attack.

The Panel also recommended the repeal of Ontario's BSA, which legislation was enacted in 1917 to protect unpaid trade creditors from "bulk sales" by a vendor of all or substantially all of its assets over a short period of time. All other provinces and territories have repealed similar legislation on the basis that other rights and remedies have been developed for trade creditors and compliance with bulk sale legislation increases transactional costs for both vendors and purchasers.

The above recommendations were viewed by the Panel as a way to support greater market certainty and confidence in market transactions in Ontario.

Modernize Ontario's laws relating to Secured Lending and Other Commercial Activity: Amendments to the Personal Property Security Act (Ontario)

Ontario's Personal Property Security Act (the "PPSA") is a debtor registry system that facilitates the registration of creditor's security interests in personal property. All the provincial and territorial personal property security acts in Canada are substantially similar, except for Ontario. This lack of harmonization of secured lending legislation adds to the cost of doing business on a national basis. In 2001, Article 9 of the United States Uniform Commercial Code (the "UCC"), the basis for Canadian provincial and territorial personal property security acts, was substantially revised. The Ontario Bar Association has also made a number of submissions over the years to reform the PPSA. The Panel recommended that the PPSA be reviewed in light of recent legislative and case law developments in Canada, the United States and elsewhere and provide for harmonization with Canada's other provinces and territories wherever possible. The Panel also made eight specific recommendations for reforming the PPSA which have been summarized below.

(a) Facilitating the use of cash collateral

The Panel recommended that the PPSA be amended to assist with facilitating the use of cash as effective and reliable collateral. In the United States, the revised Article 9 of the UCC has achieved this objective in two ways: (1) enabling security interests in deposit accounts to be perfected by "control"; and (2) providing that when so perfected, such security interests have clear and certain priority over competing security interests.

There will be significant adverse implications for Canada as it relates to central clearing of over-the-counter (OTC) derivatives if similar amendments are not made to the PPSA. These amendments are critical in order for central clearing of OTC derivatives to function properly, particularly in times of stress. During financial crises, there is a flight to quality collateral, such as cash, however, if there is a risk of perfection or priority in enforcing a security interest in cash collateral, clearing agencies and clearing members may refuse to accept transactions from Canadians for clearing. This will result in an increase in systemic risk, which is opposite to the goal of central clearing. Canada's G20 commitments, including the central clearing of OTC derivatives, is discussed here and the current draft rules relating to central clearing is discussed here.

Quebec has recently enacted similar legislative reform based on Article 9 of the UCC, which is discussed here.

(b) Proclaiming into force the PPSA "location of debtor" provisions to assist with readily determining the debtor's location

In order to properly perfect their security interest under a security agreement, lenders need clear rules in the PPSA to determine which jurisdiction's laws would apply. In December 2006, the Ontario government passed new provisions that more clearly outline the location of a debtor for the purposes of determining which jurisdiction's laws apply, however, these amendments have not yet been proclaimed into force. These provisions would locate a corporate debtor in the jurisdiction of its registered office. The Panel recommended that the 2006 amendments be proclaimed into force, as these amendments would provide a "bright line" test and greater certainty than the existing legislation.

(c) Repealing mandatory requirement of delivering copies of registrations to debtors and allowing debtors to waive the right to receive a copy

Ontario is the only Canadian jurisdiction that requires a secured party to deliver all registrations to a debtor. The Panel recommended that the PPSA should be amended to allow debtors to waive such requirement, as is the case in all of the other provincial and territorial personal property security acts in Canada.

(d) Including licences and quotas in the PPSA definition of "intangible"

The Panel acknowledged that the current law is unclear on whether a licence or quota is "personal property" within the meaning of the PPSA and therefore whether licences and quotas may be used as collateral. The Panel recommended that the PPSA be amended to be clear that licences and quotas may be treated as an "intangible" under the PPSA, as a licence or quota may be a debtor's most valuable asset and if it can be used as collateral, it may be cheaper and easier for debtors to obtain financing.

(e) Facilitating the use of electronic chattel paper to raise funds

In order to facilitate chattel paper financing the existing PPSA has a special priority rule aimed at protecting a dedicated chattel paper financier. However, the rule applies only if the chattel paper financier takes possession of the chattel paper and there is a substantial cost with generating, processing and storing the printed forms. The Panel recommended that the PPSA be amended to add provisions similar to Article 9 of the UCC that allows for perfection by control of a security interest in chattel paper and providing that a security interest in electronic chattel paper perfected by control has priority over competing security interests.

(f) Validating security over motor vehicle collateral where the vehicle identification number ("VIN") is set out in the registration despite a debtor name error

Where the collateral is a motor vehicle held as consumer goods, the secured party must include in the financing statement the debtor's name (which must match exactly the name and birth date on the debtor's birth certificate) and also the VIN. There has been a multitude of cases where a secured party mistakenly put the wrong debtor's name in the financing statement, but correctly stated the VIN of the motor vehicle. Ontario courts have held that in such cases, the correctly stated VIN cures the debtor's name error with the result that the PPSA registration remains valid. The Panel recommended that the PPSA and the Repair and Storage Liens Act (the "RSLA") be amended to codify the Ontario case law which would assist creditors in high volume vehicle registrations to properly register their security.

(g) Repealing the five-year limit on registrations related to consumer goods collateral

The Panel recommended repealing five-year limits on the registration period with respect to collateral that is (or includes) consumer goods and supports the Ontario Government's 2015 budget commitment to do so. The rationale for this action is that Ontario is the only Canadian jurisdiction that maintains the five-year limit and the practice for many consumer transactions have terms that are longer than five years.

(h) Making Minister's Orders more readily accessible to the public

In August 2007 the regulations under the PPSA and RSLA were largely repealed and replaced by the Minister's Orders. The Minister's Orders include, among other things, rules about the information required for completion of a financing statement, such as how to name a debtor. These regulations are important to be made available to lenders to ensure that their security interest is properly perfected by registration. The Minister's Orders are not available on the Ontario government's e-laws website. The Panel recommended that the Minister's Orders be made more readily accessible to the public.

Comment Period

Interested persons are invited to send any comments or questions relating to the recommendations of the Panel to the Consumer Policy and Liaison Branch of the Ontario Ministry of Government and Consumer Services by October 16, 2015. Feedback may be provided by:

  • emailing them to businesslawpolicy@ontario.ca with "Business Law Agenda Report" in the subject line; or
  • regular mail addressed to:
    Business Law Policy
    Consumer and Business Policy Unit
    Ministry of Government and Consumer Services
    777 Bay Street, 5th Floor
    Toronto, ON M7A 2J3

Footnote

1 Report, at 5.

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