Canada: New Bankruptcy Law Amendments May Impact Securitization

On September 18, 2009, a number of amendments to Canada's Bankruptcy and Insolvency Act (BIA) and Companies Creditors Arrangement Act (CCAA) came into force. The amendments were passed in 2005 and 2007 but, aside from a few provisions that became effective in July 2008, the amendments sat dormant, awaiting proclamation into force. Pursuant to Order in Council P.C. 2009-1207, almost all of these amendments have now been brought into force. Some of these provisions will be of interest to participants in the securitization market.

The BIA and CCAA now expressly permit a reorganizing debtor to disclaim or resiliate certain types of agreements (section 65.11 of the BIA and section 32 of the CCAA). The procedure is set forth in the statutes and permits other parties to contracts upon receiving notice of a proposed disclaimer (which must first be approved by the trustee or monitor) to apply to the court within 15 days of receiving notice for an order that the disclaimer does not apply. If the trustee/monitor does not approve of the proposed disclaimer, the reorganizing debtor must apply to the court in order to disclaim the agreement. In determining whether to make an order for disclaimer/resiliation, the court must have regard to the following factors: (a) whether the trustee or monitor approved the proposed disclaimer or resiliation; (b) whether the disclaimer or resiliation would enhance the prospects of a viable proposal (or compromise or arrangement) being made in respect of the debtor; and (c) whether the disclaimer or resiliation would likely cause significant financial hardship to a party to the agreement.

The provisions on disclaimer and resiliation expressly do not apply to eligible financial contracts, commercial leases, financing agreements if the debtor is the borrower or a lease of real property or an immovable if the debtor is the lessor.

There has been some concern expressed in the marketplace based upon a literal reading of the statute that the express exclusion of leases of real property from the disclaimer provisions may by implication permit lessors of personal property to disclaim or resiliate (which is a term adopted from Québec civil law) leases of personal property. This would have a potentially negative impact on the securitization of vehicle and equipment leases, which remains an important asset class within the Canadian securitization market. Although there is always some degree of uncertainty in interpreting statutes prior to any judicial interpretation of the provisions, the current view of many insolvency practitioners is that the amendments were not intended to create new law in the area of disclaimer of contracts but to codify existing practice in the area. In particular, there is nothing to suggest that the intention of the legislation was to interfere with previously acquired property rights. We will watch with interest as courts are called upon to interpret these new provisions in future cases.

Recent changes to the Canadian Secured Credit Facility (CSCF) may prompt usage

On September 17, 2009, the Business Development Bank of Canada (BDC) announced revised parameters to the $12 billion CSCF that was established earlier this year as part of the Government of Canada's Extraordinary Financing Framework. Uncommitted CSCF funds will be offered on a "first-come, first-served" basis until March 31, 2010 with the stated intent of providing continued support for participants in the auto and equipment financing sectors. Based on information from a price-discovery process that BDC undertook in August and on industry feedback, the facility is now being offered to participants at 150 basis points above Government of Canada funding costs. It is anticipated that the new pricing may result in renewed interest in the facility which to date has remained untapped.

OSC issues staff notice providing guidance for Contracts for Difference and FX Contracts

In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice on October 27 outlining OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focused on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well. Further, it is OSC Staff's intention that the interim guidance provided will remain effective until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.

According to the notice, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with Ontario's registration and prospectus requirements absent statutory exemptions or exemptive relief. In reaching its conclusion, OSC Staff considered the Supreme Court of Canada decision in Pacific Coast Coin Exchange v. Ontario (Securities Commission), [1978] 2 S.C.R. 112 and the subsequent jurisprudence. In particular, OSC Staff referred to the parallels between the facts of Pacific Coast "and the current trend towards offerings of CFDs to investors through the internet

According to OSC Staff,

[t]hese parallels include the fact that the products involve contracts that are marketed as a form of investment, the contracts involve similar forms of underlying interest, the contracts make extensive use of margin in order to magnify profits and losses, and there is significant reliance by the investor on the CFD provider to act as a counterparty, design and operate the internet platforms, and hedge risk appropriately in order to ensure the CFD provider is able to satisfy its payment and performance obligations.

The notice also noted that the relevant caselaw "emphasizes the need to consider the economic realities of the transaction and to focus on the substance rather than the form of a transaction."

However, as the prospectus requirement may not be well-suited for certain types of OTC derivative products, OSC staff "may be prepared to recommend relief" under certain circumstances. The situations in which an exemption may be provided are discussed in the notice and such an exemption was recently granted to CMC Markets U.K. and its Canadian affiliate. In that case, the OSC decided to allow CMC Canada to distribute CFDs and FX contracts to Ontario investors without having to file a prospectus provided that, among other things, CMC U.K. remained registered with the U.K. Financial Services Authority, CMC Canada maintained its registration as an investment dealer with the OSC and as a member of Investment Industry Regulatory Organization of Canada and all distributions were conducted pursuant to the rules of Quebec's Derivatives Act (QDA) and the Autorité des marchés financiers. In granting the exemption, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the QDA.

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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