The recent amendments to the Bankruptcy and Insolvency
Act (the "BIA") and the Companies' Creditors
Arrangement Act (the "CCAA") have sought to address
contractual rights amongst parties during restructuring. These
amendments have codified the common law principle that an insolvent
debtor has the power to disclaim agreements. Still, it is important
to recognize that the amendments have also legislated that some
agreements cannot be disclaimed during a restructuring. The
resulting implications can have unexpected consequences on the
restructuring process, particularly with respect to intellectual
Historically, the general principle was that receivers or
trustees in bankruptcy were free to disclaim license agreements not
in the interests of the estate, subject to applications for relief
from the disclaimer. However, innocent licensees will now have some
protection under the BIA and CCAA. After the amendments are
proclaimed in force1, an insolvent licensor who has
granted a right, including an exclusive right, to use intellectual
property to a licensee will not be able to disclaim the agreement
during a restructuring. Any attempted disclaimer will not affect
the licensee's right to use the intellectual property, so long
as the licensee continues to perform its obligations under the
While the amendments provide a safeguard for a licensee during a
restructuring, there are several cautionary points to note. First,
the term "intellectual property" is not defined within
either the BIA or the CCAA, making it unclear what falls under the
provision's protection. Similarly, the extent of the
"obligations" required to be performed by the licensee is
unclear. Is the licensee limited to making royalty payments, or can
other obligations be enforced, such as the obligation not to sue
for damages arising as a result of using the intellectual
Additionally, the wording of the amendment states that the
licensee's "use" of the intellectual property is
protected, not the license agreement itself. For example, whether
the term "use" encompasses the right to copy, modify or
sublease will be important, because it could severely limit a
licensee's rights upon the insolvency of the debtor.
The implication is that careful drafting of license agreements
is more necessary than ever to avoid being excluded from (or
included in) such ambiguous legislative terms. In any license
agreement, it will be essential to clearly define what the
"intellectual property" consists of, what "use"
the licensee is acquiring under the agreement, and what
"obligations" must be performed.
1.At the time of writing, the operative provisions of the
BIA (s. 65.11) and the CCAA (s. 32) had not been proclaimed in
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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