Newsletter Article"New" Insolvency Law Amendments to be Proclaimed in Force…Almost Four Years LaterPublished: 08/27/2009 The Federal Government recently ended years of speculation as to when insolvency law reform and other amendments, passed in 2005 and 2007, will finally become effective. The Privy Council has spoken: The amendments will be in force on September 18, 2009 for bankruptcies and receiverships effective on or after that date. Background A bit of historical perspective may be helpful. While there had been much talk and debate for decades about insolvency reform, there was no meaningful amendment of the legislation from the late 1940s for over 40 years. In 1992 and 1997, significant changes were introduced, including, for example, a requirement that secured creditors issue a legislated form of notice to enforce security, thus granting debtors ten days to consider their options. In 2005, a significant number of amendments to the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”) were introduced in the House of Commons as Bill C-55. The objectives of these amendments were to encourage viable businesses to restructure rather than to go bankrupt, to improve protection for workers impacted by the insolvency of employers, and to increase fairness and efficiency of the insolvency system. Bill C-55 was rushed through Parliament, as all parties in the then-fragile minority government were able to agree that protection of workers was paramount - whether or not insolvency professionals believed that the magnitude of this issue in practice in fact warranted legislation or not. As part of this bundle of legislative changes, the Wage Earner Protection Program Act, which provides for payment of outstanding wages to individuals whose employment is terminated as a result of a bankruptcy or receivership, was passed and received Royal Assent on November 25, 2005 to become Chapter 47 of the Statutes of Canada, 2005 (“Chapter 47”). Chapter 47 was not immediately proclaimed into force, as it was recognized that there had been insufficient time to examine the impact of the legislation, and that amendments would be required. Initially, the amendments which were considered necessary by the government were contained in Bill C-62. However, that Bill did not pass before the House lifted. Essentially the same amendments were reintroduced as Bill C-12, which passed and received Royal Assent on December 14, 2007, to become Chapter 36 of the Statutes of Canada, 2007 (“Chapter 36”). Amendments in Force Now Chapter 47 and Chapter 36 then languished in a state of limbo – technically passed as laws but not proclaimed, other than certain provisions which came into force only last summer. Effective July 7, 2008, certain provisions, notably the Wage Earner Protection Program and certain changes to the BIA, were proclaimed in force. The BIA amendments currently in force include: - super-priority charges for wages (up to $2,000 per employee, over all the current assets of the employer) and unremitted pension contributions (unlimited in amount, over all assets of the employer); and - exemption for RRSPs (Registered Retirement Savings Plans). Remaining Amendments in Force September 18, 2009 The remaining unproclaimed amendments contained in Chapter 47 and Chapter 36 (other than those rendered moot by the passage of time or other legislation) will be in force on September 18, 2009. Given the years that have passed since the new provisions were introduced, a brief refresher may be helpful. For example, new provisions have been added to the CCAA and the BIA with a view to harmonizing these statutes: o Priority Charges – The BIA and the CCAA will now contain express provisions authorizing priority charges against the commercial debtor’s assets for interim financing, for director indemnification and for restructuring costs. These provisions essentially codify the practice which the Courts had evolved by creative application of their inherent jurisdiction and judicial discretion, and provide a more consistent framework. A new provision for “critical suppliers” is introduced in the CCAA, pursuant to which a court may require a supplier to continue to supply a debtor, on the security of a charge against the debtor’s assets. o Disclaimer of Agreements - Contracts may be disclaimed by commercial debtors, with the approval of the trustee or monitor, as the case may be, or by court order. The co-contracting party may object, in which case the court must consider whether the disclaimer would enhance the prospects of a viable proposal (under the BIA) or plan of arrangement (under the CCAA), or cause significant financial hardship. The other party to the disclaimed agreement will then have a provable claim for its loss. Certain agreements, such as collective agreements, eligible financial contracts, financing agreements where the debtor is the borrower, and leases of real property if the debtor is lessor, may not be disclaimed. In addition, any disclaimer of an agreement to use intellectual property will not affect the party’s right to use the intellectual property – including the right to enforce exclusive use - if the party is performing its obligations under the agreement. o Assignment of Contracts - The Court may make an order assigning the rights and obligations of a debtor under an agreement, unless the rights are not assignable by reason of their nature, or if they arise under an eligible financial contract or a collective agreement. o Cross-Border Insolvencies - The cross-border insolvency provisions in each Act will be replaced with new rules based on the UNCITRAL Model Law on Cross-Border Insolvency. o Equity Claims – Holders of equity claims, for example shareholders’ claims for damages arising from the purchase or sale of shares of the debtor, are subordinated to the claims of creditors in a proposal or a plan, and may not vote on a proposal or plan without court order. o Transfers at Undervalue – The concepts of “settlement” and “reviewable transaction” in the BIA will be replaced with the concept of whether a transaction was a “transfer at undervalue”. These provisions will be incorporated by reference into the CCAA. o“ipso facto” - The CCAA will expressly provide, as the BIA does already, that no person can terminate or amend, or claim accelerated payment under any agreement by reason only that the debtor is insolvent or that insolvency proceedings are commenced against it. o Restriction on Disposition of Assets – Once a BIA or CCAA proceeding has been commenced, insolvent debtors may not dispose of assets outside the ordinary course of business without court order. Suppliers to debtors who become subject to bankruptcy or receivership will appreciate the simplification of the rules regarding demand for repossession under the BIA. Demands must be issued within 15 days of the bankruptcy or receivership for goods delivered within the thirty days prior to the bankruptcy or receivership. That 15 day period may be extended by the trustee, the receiver or the court. Stay tuned for the next Cassels Brock e-Communique for analysis on the impact of these and other changes to insolvency laws. [1] With the enthusiastic and capable assistance of Jennifer Hansen, student-at law. [2] As Chair of the Canadian Bar Association - Bankruptcy and Insolvency Section from 2004-2006, Deborah S. Grieve participated in and oversaw submissions of the Canadian Bar Association with respect to Bill C-55, and appeared as one of the few witnesses to comment on Bill C-55 before the House of Commons Committee, in November 2005. |