1. Overview of Legal and Regulatory System for Insolvency/ Restructuring/Liquidation
1.1 Legal Framework There are three main insolvency statutes in Canada:
- the Bankruptcy and Insolvency Act (BIA);
- the Companies' Creditors Arrangement Act (CCAA); and
- the Winding-up and Restructuring Act (WURA).
The BIA governs proposals (a restructuring regime for individuals and companies (typically smaller to mid-sized companies)), receiverships and bankruptcies (both personal and corporate).
The CCAA provides a restructuring regime for larger corporations.
The WURA is a liquidation statute designed to deal with, among other things, the formal liquidation of certain regulated entities, including financial institutions and insurance companies.
1.2 Types of Insolvency Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receiverships
There are five main insolvency processes in Canada:
- bankruptcy proceedings under the BIA;
- proposal proceedings under the BIA;
- proceedings under the CCAA;
- receiverships; and
- winding-up proceedings under the WURA.
Voluntary Proceedings
A debtor may initiate voluntary bankruptcy proceedings by filing an assignment in bankruptcy for the general benefit of its creditors. To make an assignment in bankruptcy, the debtor must be an "insolvent person" within the meaning of the BIA and file certain prescribed forms with the Office of the Superintendent of Bankruptcy (OSB).
Debtors may also initiate proposal proceedings under the BIA or reorganisation proceedings under the CCAA.
Involuntary Proceedings
Involuntary proceedings may be commenced by creditors under four of the five insolvency and restructuring regimes summarised above.
Creditors can apply for:
- the appointment of receivers under the BIA or provincial statutes;
- bankruptcy orders under the BIA when debtors have committed acts of bankruptcy within the preceding six months, and provided the applicant creditor has an unsecured liquidated claim in excess of CAD1,000; and
- initial orders under the CCAA.
Involuntary proceedings can be commenced in respect of entities to which WURA applies by:
- creditors in respect of certain types of companies;
- shareholders; and
- the Attorney General of Canada (AG) in respect of financial institutions over which the Office of the Superintendent of Financial Institutions (OSFI) has taken control.
Specific Statutory Restructuring and Insolvency Regimes
The restructuring and insolvency regime applicable to banks regulated under Canadian law is governed by both the Bank Act and the WURA. Generally, following the exercise of control over a bank by OSFI under the Bank Act, the AG, at the request of OSFI, will seek the appointment of a liquidator and the making of a winding-up order under the WURA
Other financial institutions such as credit unions, insurance companies, loan and trust companies and related businesses are subject to the WURA and their home statutes (eg, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act) with respect to substantive or regulatory matters relevant to winding up under the WURA.
Part XII of the BIA applies to the insolvency of "securities firms".
Historically, railway companies have been subject to specific restructuring and insolvency regimes prescribed under their statutes of incorporation; however, in limited circumstances, they can apply under the CCAA.
1.3 Statutory Officers
One of the hallmarks of Canadian bankruptcy and insolvency proceedings is the requirement that a licensed insolvency trustee (LIT) be involved in a supervisory or advisory role, depending on the proceedings.
LITs are insolvency specialists licensed by the OSB.
Types of Officers
Trustees in bankruptcy
In a bankruptcy proceeding, the debtor's property vests in a trustee in bankruptcy, subject to the rights of secured creditors, and the debtor ceases to have control over its affairs. The trustee replaces the management of the corporation and assumes control over the debtor's assets
Trustees are licensed by the OSB to carry out the administration of all aspects of a bankruptcy proceeding. The trustee administers the estate for the benefit of the bankrupt's unsecured creditors. Secured creditors retain their right to enforce on their security.
As a court officer, the trustee must act fairly, equitably and impartially. Trustees are court officers and act as fiduciaries for the benefit of the bankrupt's creditors. The BIA imposes numerous statutory duties on trustees, many of which are administrative in nature. The BIA also confers broad powers that a trustee can exercise with the permission of the inspectors appointed in the bankruptcy.
Monitors
A monitor oversees CCAA proceedings, reports to the court on the debtor's business and financial affairs, and assists the debtor with the formulation of its plan, if any. The monitor does not displace the debtor, which continues to be in control of its property.
The monitor also has many duties that are administrative in nature, such as publishing orders and reports and filing prescribed documents with the OSB. In addition, the monitor has duties that are substantive in nature such as reviewing the debtor's cash-flow statements filed with the court and commenting on them, advising on the reasonableness and fairness of a proposed plan, if any, and reporting to the court on developments or changes in the proceedings.
The CCAA imposes an obligation on the monitor to act honestly and in good faith.
In addition to statutory obligations, the CCAA initial order and ensuing orders may require the monitor to perform additional obligations. For example, they may empower the monitor to monitor the debtor's receipts and disbursements and assist the debtor in dealings with its creditors and in preparing the required cash-flow statements.
No LIT may be appointed as monitor if, within the two years preceding the commencement of the proceedings, the LIT was a director, officer or employee of the debtor, or the auditor, accountant or legal counsel of the debtor, or if the LIT is related to the debtor, or any director or officer of the debtor.
Court-appointed receivers
The BIA provides for the enforcement of security by a secured creditor and the appointment of a receiver on a national basis over all or part of a debtor's property that is subject to the security. A receiver has broad power to market and sell a debtor's assets with the oversight of the court. The receiver's duties include:
- giving notice of its appointment to all creditors;
- issuing reports on a regular basis outlining the status of the receivership; and
- preparing a final report and statement of receipts and disbursements when the appointment is completed or terminated.
A court-appointed receiver is an officer of the court, subject to the court's authority and direction and accountable to the court. A courtappointed receiver has a fiduciary duty to act in the best interest of all interested parties, including the debtor. A court-appointed receiver takes instruction from neither security holder nor debtor, and generally retains independent counsel.
A receiver must exercise prudence and reasonable care in the conduct of the receivership and in dealings with the receivership property.
The BIA imposes the following statutory duties on receivers:
- to disclose and account for their conduct of the receivership;
- to act honestly and in good faith; and
- to deal with the property of the debtor in a commercially reasonable manner.
Proposal trustees
The role of a proposal trustee is like that of a monitor. A proposal trustee is an independent third party appointed by the OSB to assist the debtor with the filing of its proposal and to monitor the debtor's ongoing operations during the proceedings. A proposal trustee must be an LIT. During proposal proceedings, the debtor continues to be in possession of its assets; the assets do not vest in the proposal trustee.
The duties of a proposal trustee include monitoring the business's ongoing financial activities, reporting to the court on events that might affect the viability of the debtor, assisting the debtor in the preparation of its proposal, notifying the creditors of meetings of creditors and tabulating the votes at these meetings. The proposal trustee will also prepare a report on the proposal that is included in the mailing of the proposal to creditors
Proposal trustees must report on the reasonability of the cash flows filed by the debtor, on material adverse changes in the debtor's affairs and on any proposal presented by the debtor. The proposal trustee must advise the court on the terms of the proposal and the conduct of the debtor.
The proposal trustee's recommendation on the proposal will typically include a statement advising that the proposal offers more to a debtor's creditors than they would receive in a bankruptcy. If the proposal trustee cannot make this statement, it is likely that a court will refuse to approve the proposal.
Inspectors
In bankruptcy proceedings, unsecured creditors appoint inspectors whose role is to oversee the bankruptcy proceedings and approve certain actions of the trustee in bankruptcy, including the sale of most assets. Inspectors supervise the trustee in bankruptcy on behalf of creditors and instruct the trustee in bankruptcy to act in a manner that is appropriate in order to protect the interests of creditors and the bankrupt estate.
Appointing an inspector is mandatory in corporate bankruptcy proceedings. Inspectors represent the interests of the creditors; they do not need to be LITs.
Inspectors may also be appointed in proposal proceedings; however, this is optional and infrequent.
Selection of Officers
In voluntary proceedings, the debtor will usually select the LIT firm that it recommends be appointed as court officer. If a creditor initiates the proceeding, that creditor will usually put forward its choice of LIT firm. The appointment of a monitor or court-appointed receiver is no official until the court issues an order confirming the appointment.
With the exception of inspectors in bankruptcy proceedings, statutory officers are restructuring professionals with business and accounting qualifications who assist the debtor's employees in managing operations during an insolvency proceeding, as well as evaluating and making recommendations to the court (and in proposal and CCAA proceedings, the debtor's board of directors) on restructuring alternatives available to the debtor. Trustees in bankruptcy and receivers displace the directors of the debtor. They may decide to continue to work with existing management. The debtor's employees are not employees of the court-appointed officers, although they work under their supervision and many of the decisions to be taken in a proceeding will require the court-appointed officer's consent.
Only an LIT may act as a trustee in bankruptcy, proposal trustee, monitor or court-appointed receiver
Organisation of Creditors' Committees
Although permitted, there is no requirement under the CCAA or the BIA for the formation of creditors' committees. Creditors' committees have been recognised by courts in limited circumstances and granted court-approved funding
To view the full article click here
Originally published by Chambers and Partners
Read the original article on GowlingWLG.com
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.
