Summary Overview

The following is a summary of certain1 of the major changes to the Bankruptcy and Insolvency Act (the "BIA") and the Companies' Creditors Arrangement Act (the "CCAA") that will come into force on September 18, 2009, pursuant to either An Act to Amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005, S.C. 2007, c. 36 or An Act to Establish the Wage Earner Protection Program Act, to Amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to Make Consequential Amendments to Other Acts, S.C. 2005, c. 47. Many of the amendments are merely codifications of existing common law and practice. Where applicable, this memorandum also summarizes certain Standards of Professional Practice (each, a "Standard") introduced by the Canadian Association of Insolvency and Restructuring Professionals.

I. Executive Summary of the Changes to the BIA and CCAA

The CCAA and BIA have been amended to, among other things:

  1. impose certain requirements when an interim receiver is being appointed under the BIA and limit the scope of the powers of an interim receiver;
  2. shield a monitor and trustee from personal liability when carrying on the business of the debtor, or continuing to employ the debtor's employees, in respect of claims that arose on or before his or her appointment;
  3. codify the availability of interim financing during restructuring proceedings, including the granting of a secured charge to the interim lender;
  4. clarify the impact of the stay of proceedings on a regulatory body and the termination of agreements;
  5. allow the debtor or trustee to obtain an order to assign a debtor's rights and obligations under an agreement to another person;
  6. permit a reorganizing debtor to disclaim or resiliate certain types of agreements;
  7. give the court the power to remove directors in restructuring proceedings;
  8. allow the court to grant charges in favour of any director or officer of the debtor, or charges to cover certain costs incurred in the reorganization, and grant the charge priority over existing secured creditors;
  9. modify the rights of unpaid suppliers under the BIA and empower the court to declare that a person is a critical supplier in a CCAA proceeding;
  10. provide a mechanism for a reorganizing debtor to sell or otherwise dispose of assets outside the ordinary course of business;
  11. allow the debtor and bargaining agent to revise the terms of an existing collective bargaining agreement;
  12. allow a debtor company to divide its creditors into classes for the purpose of voting on a plan and exclude creditors having equity claims from the right to vote on a proposal under the BIA or at a meeting under the CCAA to consider a plan, unless the court orders otherwise;
  13. prohibit the court from approving a proposal or sanctioning a plan unless the proposal or plan provides for the payment of specific outstanding pension obligations, employees' wage claims, and certain Crown claims;
  14. adopt procedures for dealing with cross-border insolvency proceedings based on the United Nations Commission on International Trade Law Model Law on Cross-border Insolvency;
  15. amend the time period for attacking transactions under the BIA, repeal the provisions of the BIA on settlements and reviewable transactions and replace them with a new provision called "transfers at undervalue", and incorporate these sections into the CCAA; and
  16. introduce changes that require a debtor to file certain material when filing a proposal or making an initial application under the CCAA.

II. Explanation of the Amendments to the BIA and CCAA

1. The Receiver

An application for an appointment of an interim receiver under sections 46 and 47 of the BIA is to be filed in a court having jurisdiction in the district of the locality of a debtor. Changes to the BIA limit the period of an interim receiver appointment and limit the powers that may be granted to the interim receiver. The period is to end with the appointment of the interim receiver or trustee in bankruptcy, or 30 days after the day on which the interim receiver was appointed or any period specified by the court. There are similar limits on the appointment of a receiver in conjunction with a proposal proceeding.

The BIA has been amended to limit the powers that may be granted to an interim receiver to (i) taking possession of all or part of the debtor's property, (ii) exercising such control over that property and the debtor's business as the court considers advisable, (iii) taking conservatory measures, and (iv) summarily disposing of property that is perishable or likely to depreciate rapidly in value. The provision formerly contained in the BIA allowing the interim receiver to take such other action as the court considers advisable has been removed. The effect of this is likely to be to curtail the use of interim receiverships and move to receivers appointed under section 243 or under the Courts of Justice Act (Ontario) or similar legislation in other provinces.

Changes to section 243 of the BIA give authority to the court to appoint a receiver to take possession of the property of an insolvent person, exercise any control the court considers advisable over that property, or take any other action that the court considers advisable. A receiver appointed either under the terms of a security agreement, or by the court, must be a trustee. Under the amendments to the BIA, the court may make any order respecting fees and disbursements of the receiver that it considers appropriate and may grant a priority charge to the receiver ahead of secured creditors. However, the court is not to order such a priority charge unless it is satisfied that the secured creditors who may be materially affected by the order were given reasonable notice and opportunity to make representations to the court.

2. The Monitor and Trustee

The new CCAA provisions set out the duties and the functions of the monitor and provide the monitor with a due diligence defence in respect of certain of the reports it prepares in accordance with the Act. The new CCAA provisions also restrict who may be appointed as a monitor. A trustee who, in the two years prior to appointment, was a (i) director, officer or employee of the company, (ii) the auditor, accountant or legal counsel, or a partner or an employee of the auditor, accountant or legal counsel, of the debtor company, (iii) was related to the company or a director or officer of the company, or (iv) was a trustee under the trust indenture of the company or person related to the company, or the holder of a power of attorney in certain circumstances or related to such trustee or holder of a power of attorney, may only be appointed as the monitor with permission of the court.

If the monitor or trustee carries on the business of the debtor or continues employment of a debtor's employees, the monitor or trustee is not by reason of that fact personally liable in respect of a liability that (i) relates to the employees or former employees of the debtor or a predecessor of the debtor, or in respect of a pension plan for the benefit of those employees, and (ii) existed before the monitor or trustee was appointed or is calculated by a reference period before the appointment. A "trustee" for the purposes of this section of the BIA includes an interim receiver, a receiver within the meaning of subsection 243(2) and any other person appointed to take possession or control of any property of an insolvent person.

3. Interim Financing/Debtor-in-Possession Loans

New sections in the CCAA and BIA permit a debtor undergoing a reorganization to apply to the court for an order declaring that the debtor's property is subject to a security or charge in favour of a person who agrees to lend to the debtor an amount that is approved as required by the debtor, having regard to its cash-flow statement. The application must be on notice to the secured creditors who are likely to be affected by the security or charge. The security or charge may not secure an obligation that existed before the order was made; this change may limit efforts by existing lenders to improve their security position as a condition of providing a debtor-in-possession loan.

In deciding whether to make the order, the court must consider, among other things, the period during which the debtor is expected to be subject to proceedings, how the debtor will be managed during the proceedings, whether the debtor's management has the confidence of its major creditors, whether any creditor will be materially prejudiced as a result of the security or charge, the nature and value of the company's assets or the debtor's property, the report of the trustee or monitor, and whether the loan will enhance the prospects of a viable compromise or arrangement or proposal being made in respect of the debtor. The court may grant this security or charge priority over the claim of a secured creditor or, with consent, a previous security or charge granted pursuant to these sections.

Standard No. 09-2 provides guidance to a monitor in fulfilling its statutory obligations where interim financing is sought by a debtor. Among other things, the Standard notes that the monitor is required to advise the debtor company that the responsibility for identifying and arranging interim financing rests with the debtor. The monitor is also required to include a statement in its report on whether the interim financing is appropriately reflected in the cash flow statement of the debtor and the assumptions relied upon therein.

4. Stay of Proceedings

(a) Regulatory Bodies

Subject to certain exceptions, the stay of proceedings provided for by section 11.02 of the CCAA and section 69 or 69.1 of the BIA does not affect the right of a regulatory body with respect to any investigation or proceeding taken against the company or insolvent person except where the regulatory body is attempting to enforce its rights as a creditor. A "regulatory body" includes a person that has the powers relating to the enforcement or administration of an Act of Parliament or the legislature of a province.

(b) Termination of Agreements

The CCAA and BIA prohibit a person from terminating, amending or claiming accelerated payment or forfeiture of the term under any agreement2 including a security agreement, with a debtor company or individual bankrupt by reason only of the individual's bankruptcy or insolvency or because the company has commenced restructuring proceedings under the CCAA. A lessor is also prohibited from terminating or amending a lease and no public utility may discontinue service only by reason of the bankruptcy, insolvency, commencement of proceedings under the CCAA or non-payment of rent or services, respectively. The parties may not contract out of this provision of the CCAA or BIA.

Both the CCAA and BIA provide that the stay does not prevent a person from requiring (i) payments to be made in cash for goods, services, use of leased property or other valuable consideration provided after the date of filing of the initial application or date of bankruptcy, or (ii) requiring the further advance of money or credit. The CCAA also provides that the stay does not prevent a lessor of aircraft objects under an agreement from taking possession of the aircraft objects if certain criteria are satisfied.

On application by an affected party, the court may declare that this section does not apply if the applicant satisfies the court that the operation of this section would likely cause the applicant significant hardship.

5. Assignment of Agreements

New provisions have been added to both the CCAA and BIA governing the assignment of agreements. The trustee in a BIA proceeding, or the debtor company in a CCAA proceeding may apply to the court, on notice to the relevant parties, for an order assigning the rights and obligations of the debtor under an agreement. Certain agreements are excluded from the application of the section, including an agreement entered into on, or after, the date of bankruptcy or day when proceedings are commenced under the CCAA, eligible financial contracts and collective agreements. In deciding whether to make an assignment, the court will consider, among other things, whether the assignee will be able to perform the obligations under the agreement and whether it would be appropriate to assign the rights and obligations to that person. In the case of a proceeding commenced under the CCAA, the court will also consider whether the monitor approved the proposed assignment. The court will only make such an order if it is satisfied that all monetary defaults in respect of the agreement, other than those arising by reason only of the person's bankruptcy, insolvency, commencement of proceedings under the CCAA or failure to perform a non-monetary obligation, will be remedied.

Standard No. 09-3 provides guidance to a monitor in drafting its report where a company is seeking to assign its rights and obligations under an agreement. While the CCAA does not specifically require the monitor to file a report in respect of an assignment of an agreement, as noted above, one of the factors to be considered by the court is whether the monitor approved the proposed assignment. Among other things, the Standard requires the monitor to understand the purpose of the proposed assignment, the benefits and costs to the debtor resulting from such assignment, and the impact of the assignment on the debtor.

6. Disclaimer or Resiliation of Agreements

Changes to the CCAA and BIA will give debtors the right to disclaim or terminate agreements, subject to specific limitations, by giving notice in the prescribed form to the counterparty and trustee or monitor. This section of the BIA applies to a debtor, other than an individual, in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) of the BIA. The debtor may not give notice unless the trustee or monitor, where applicable, approves the proposed disclaimer or resiliation. If the trustee or monitor does not provide its approval, the debtor may apply to the court for an order that the agreement is disclaimed or resiliated.

The debtor cannot disclaim or terminate eligible financial contracts or collective agreements. Similarly, the debtor cannot disclaim financing agreements if it is a borrower or a lease of real property or an immovable if the debtor is the lessor. In the case of a disclaimer under the BIA, the debtor also cannot disclaim a commercial lease within the meaning of subsection 65.2(1) of the BIA.

The counterparty may object to the disclaimer if it applies to the court within 15 days of the debtor giving notice of the disclaimer. If no application is made, the agreement is disclaimed or terminated on the 30th day after the date the debtor gave notice. Any disclaimer or resiliation does not affect a party's right to use intellectual property if that right has been granted by the debtor in an agreement. If an agreement is disclaimed, the counterparty who suffers a loss in relation to the disclaimer or resiliation has a provable claim.

Standard No. 09-5 provides guidance to a monitor in drafting its report on the disclaimer or resiliation of an agreement. The CCAA does not impose an explicit requirement on the monitor to file a report. Notwithstanding, the debtor may not give notice of the disclaimer unless the monitor approves the proposed disclaimer or resiliation. Pursuant to the Standard, where a disclaimer or resiliation is authorized by the court, the monitor is required to notify the counterparty to the disclaimed agreement of its right to assert a claim for the loss, if any, suffered as a result of the disclaimer or resiliation.

7. Removal of Directors

Both the CCAA and the BIA have been amended to give the court the power to remove directors in restructuring proceedings. The court may, on the application of any interested person, make an order removing a director from office in a restructuring proceeding if the court is satisfied the director (i) is, or is likely to, unreasonably impair the possibility of a viable proposal or plan being made in respect of the debtor, or (ii) is acting or likely to act inappropriately as a director. The court is also permitted to fill any vacancy created by such order.

This section of the BIA applies to the director of a debtor in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) of the BIA.

8. Directors' and Administrative Charges

Changes to the CCAA and BIA codify the court's power to declare that the property of the debtor is subject to a security or charge to secure:

  1. the indemnification of directors and officers for obligations and liabilities that they may incur after the commencement of restructuring proceedings. However, such an order should not be made if adequate indemnification insurance could be obtained for the director or officer at a reasonable cost and the charge will not apply; or
  2. the costs of the trustee or monitor, where applicable, and financial legal or other experts engaged by it, the debtor or any other interested party.

The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the debtor. These sections of the BIA apply to a debtor in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) of the BIA.

9. Unpaid Suppliers and Critical Suppliers

Changes to section 81.1 of the BIA modify the rights of unpaid suppliers to repossess their goods. With the changes, an unpaid supplier may repossess goods delivered any time in the 30 days prior to a bankruptcy or receivership and has a period of 15 days after the filing of such event to do so. Subsection 81.1(5) permits the trustee, receiver or court to extend the 15-day period before its expiry. New subsection 81.1(4) makes the unpaid supplier rule applicable to situations where a debtor initially proceeded by way of proposal rather than bankruptcy or receivership.

Changes to the CCAA will add a provision empowering the court, on application by a debtor and on notice to the secured creditors who are likely to be affected, to declare that a person is a critical supplier if the goods or services it supplies are critical to the continued operation of the debtor's business. The court may compel a critical supplier to supply goods or services to the debtor on terms that are consistent with the supply relationship or on terms the court considers appropriate. An order compelling a critical supplier to supply goods or services to the debtor cannot be made unless a security charge is created in favour of the supplier. The court may order that the security or charge ranks in priority to any other security.

10. Restrictions on the Disposal of Certain Assets

Changes to the CCAA and BIA provide for judicial supervision of the sale of a debtor's assets. The debtor is prohibited from selling or disposing of its assets out of the ordinary course of business without court approval. Any application to the court for disposition of property made under this section must be on notice to the secured creditors who may be affected by the order.

In determining whether to authorize the transaction, the CCAA and BIA set out what the court shall consider, which includes, among other things, the process leading to the proposed sale, whether the monitor or trustee approved the process, whether the monitor or trustee filed a report stating its opinion that the sale is more beneficial than a sale under a bankruptcy, the extent to which creditors were consulted, the effect of the proposed sale or disposition on the creditors and other interested parties, and whether the consideration to be received for the assets is reasonable and fair, taking into account their fair market value. The court will only grant the authorization if it is satisfied that the insolvent company will make payments for certain wage and pension plan arrears.3

In addition to the factors listed above, if the proposed sale is to a related person, the court may grant the authorization only if it is satisfied that good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the debtor and the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition.

This section of the BIA applies to a debtor in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) of the BIA. The BIA also contains provisions prohibiting the trustee from selling or disposing of a bankrupt's property to a related person, unless authorized by the court.

Standard No. 09-4 provides guidance to a monitor in respect of its duties where there is a sale or disposition of assets. Prior to the commencement of a sale process, the monitor is required to review the process proposed by the debtor company and determine whether it is reasonable. Where the monitor does not approve of the proposed sale process, the monitor shall discuss its concerns with the debtor and, where appropriate, file a report with the court. The Standard also prescribes certain information that the report shall include where the proposed purchaser is a related party of the debtor.

11. Effect of the CCAA and BIA on Collective Bargaining

Under changes to the CCAA and BIA, a collective agreement remains in force and cannot be altered except as provided for in section 33 of the CCAA and 65.12 of the BIA. The new statutory provisions attempt to facilitate a process under which the parties may negotiate the terms of a collective agreement. For instance, if the debtor is unable to reach a voluntary agreement with the bargaining agent to revise any of the agreement's provisions, it may, on giving five days' notice to the bargaining agent, apply to the court to serve a notice to bargain. The court will only issue the order if it is satisfied that (i) a viable proposal or plan could not be made, taking into account the terms of the collective bargaining agreement, (ii) the debtor has made good faith efforts to renegotiate the collective agreement, and (iii) the failure to issue the order will result in irreparable damage to the debtor.

If the parties agree to revise the collective agreement, the bargaining agent is deemed to have an unsecured claim against the debtor for the value of any concessions granted during negotiations with the debtor. On the application of the bargaining agent, the court may order the debtor to make information available to the bargaining agent that relates to the debtor's business or financial affairs.

This section of the BIA applies to a debtor in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) of the BIA.

12. Claims and Classes of Creditors

The CCAA claim provisions have been changed to align with the claim provisions under the BIA. For example, claims that may be dealt with by a compromise or arrangement include debts or liabilities, present or future, to which the company is subject. Subject to certain exceptions, a compromise may not deal with fines, penalties, or damages relating to bodily harm and death, among other things. The CCAA also provides guidance for determining the amount represented by a claim of a secured or unsecured creditor.

Under the CCAA, the debtor company is permitted to divide its creditors into classes for the purpose of voting on a plan. The debtor must apply for court approval of the division before the meeting is held and consider certain factors in dividing the creditors into classes. The BIA and CCAA now contain a definition of "equity claim" and provide that all creditors with equity claims must be placed in the same class, which class cannot vote on the proposal or at a meeting held to vote on the plan, unless the court orders otherwise.

13. Approving a Proposal or Sanctioning a Plan

The new changes to the CCAA and BIA provide that the court may not sanction a compromise or an arrangement or approve a proposal in respect of an employer or company that participates in a prescribed pension plan unless it provides for payment of (i) contributions deducted from employees' salaries but not remitted to the pension fund, (ii) certain prescribed amounts if the plan is regulated by an Act of Parliament, and (iii) certain prescribed amounts in the case of any other prescribed pension plan, and the court is satisfied the employer has the ability to make the payments. The court is authorized, however, to permit a compromise of pension contribution obligations where the parties agree and the pension regulator approves. The court will also not approve a proposal or plan that provides for the payment of an equity claim unless it provides for all claims that are not equity claims to be paid in full before the equity claim is to be paid.

New language has been introduced into the CCAA to align it with subsection 60(1.3) of the BIA. The changes to the CCAA prohibit the court from sanctioning a plan of arrangement or compromise unless (i) the plan requires the payment of all amounts at least equal to the amounts the employees or former employees would have been entitled to receive under paragraph 136(1)(d) of the BIA if the company had become bankrupt on the day of the filing of the initial application, and wages, salaries, commissions or compensation for services rendered after proceedings commence under the CCAA, and (ii) the court is satisfied the company can and will make the payments. The CCAA now also requires a plan to provide for the payment of certain Crown claims, unless otherwise consented to by the Crown.

Standard No. 09-7 sets out the duties of a monitor where a debtor company proposes to file a plan of compromise or arrangement. Among other things, the Standard requires the monitor to advise the company that the development and substance of the plan is the responsibility of the company and that the monitor has a duty to report on the plan. If the monitor objects to the plan or makes no recommendation, the monitor shall indicate its reasons for the objection.

14. Cross-Border Insolvencies

The CCAA and BIA are amended by the addition of a part entitled "Cross-Border Insolvencies". The cross-border insolvency provisions will apply when a foreign representative applies to a Canadian court for an order recognizing a foreign proceeding. It is notable that the definition of foreign representative differs between the CCAA and the BIA.

There are two types of foreign proceedings: (i) a foreign main proceeding; and (ii) a foreign non-main proceeding. The former is a proceeding in a jurisdiction that is the centre of the main interest of the debtor. The centre of a debtor's main interest is determined by the location of its registered office or residence.

The legal effect of the recognition of a main order may include the imposition of a stay of proceedings, and prohibiting the debtor from selling or disposing of its property that is situated in Canada. On making the recognition order, Canadian courts and persons who perform duties in connection with insolvency are charged with a duty to cooperate with the foreign representative.

15. Preferences and Transfers at Undervalue

(a) Preferences

Section 95 of the BIA has been expanded to distinguish between arm's length transfers and non-arm's length transfers. A transfer of property made, provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person in favour of a creditor who is dealing at arm's length with the insolvent person with a view to giving them a preference over another creditor is void as against the trustee if it is made within three months of the initial bankruptcy event. In the case of non-arm's length transfers, if the transfer is made up to 12 months before the date of the initial bankruptcy event it is void as against the trustee.

(b) Transfers at Undervalue

The BIA sections dealing with settlements and reviewable transactions have been repealed and replaced with a new general cause of action for transfers at undervalue found in section 96 of the BIA. Transfers at arm's length will be subject to section 96 if (i) the transfer took place within one year before the date of the initial bankruptcy event, (ii) the debtor was insolvent at the time of the transfer or rendered insolvent by it, and (iii) the debtor intended to defeat, defraud or delay a creditor. Transfers between parties who are not dealing at arm's length will be subject to section 96 if (i) the transfer took place within one year before the date of the initial bankruptcy event, or (ii) the transfer took place within one to five years before the date of the initial bankruptcy event if (A) the debtor was insolvent at the time of the transfer or rendered insolvent by it, or (B) intended to defeat, defraud or delay a creditor. If the court finds that the transaction was a transfer at undervalue, the court may declare the transfer is void as against the trustee or grant judgment for the difference between the consideration given and received by the debtor.

Changes to the CCAA specify that sections of the BIA dealing with preferences and transfers at undervalue will apply to proceedings under the CCAA.

16. Filing Proposals under the BIA and Applications under the CCAA

Certain changes to Division I proposals have been introduced to establish clear rules on proposals. These include the requirement to file a prescribed form when filing the proposal and the requirement of monthly cash flow statements to be prepared by the person making the proposal. Similar changes to the CCAA require the debtor to provide the following documents with its initial application: (i) a weekly projected cash flow statement, (ii) a report containing the prescribed representations of the debtor regarding the preparation of the cash flow statement, and (iii) copies of all financial statements prepared during the year before the application.

Standard No. 09-1 provides guidance to a monitor filing a report on the debtor's cash flow forecast in support of the initial application. The Standard encourages the monitor to obtain written confirmation from an officer or director of the debtor company that the cash flow statement and the assumptions on which it is based are the responsibility of the debtor company and the debtor's responsibility includes ensuring the assumptions are appropriate in the circumstances.

Footnotes

1 This perspective does not summarize certain amendments, including, (i) changes to, and the introduction of, certain definitions, (ii) provisions dealing with consumer bankruptcies and proposals, (iii) certain duties and powers of the trustee or the monitor, (iv) certain provisions dealing with the administration of estates, including procedures and voting at meetings, (v) provisions dealing with section 149 notices and taxing authorities (the section has been amended to clarify when claims may be filed by taxing authorities), (vi) the powers, duties and functions of the Superintendent of Bankruptcy, (vii) assignment of book debts, and (viii) certain administrative and technical amendments.

2 The relevant sections of the CCAA and BIA do not apply in respect of an eligible financial contract or to prevent a member of the Canadian Payments Association from ceasing to act as a clearing agent or group clearer for an insolvent person in accordance with the Canadian Payments Act.

3 It should be noted that there is a small drafting error under the proposed subsection 36(7) of the CCAA. That section reads: "The court may grant the authorization only if the court is satisfied that the company can and will make the payments that would have been required under paragraphs 6(4)(a) and (5)(a) if the court had sanctioned the compromise or arrangement." These provisions are renumbered under clause 106 of Bill C-12 as paragraphs 6(5)(a) and 6(6)(a). Paragraph 6(4)(a) does not exist. Paragraphs 6(5)(a) and 6(6)(a) of the CCAA, as enacted by the amendments, are the provisions that require the debtor to meet its obligations with respect to unpaid wage claims and unremitted pension plan contributions.

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.