Restructuring and InsolvencyCanadian Insolvency Law Amendments in force September 18, 2009Published: 09/17/2009 By Joseph J. Bellissimo, John Birch, Deborah S. Grieve, Marlin Horst, Bruce Leonard, Marc Mercier, Alex Tarantino, David Ward In This Issue
IntroductionThis newsletter has been published in National Insolvency Review, Vol. 27, No. 1. In 2005 and 2007 the Canadian government enacted amendments to Canada’s primary insolvency legislation, the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”). While the Wage Earner Protection Program Act (“WEPPA”) and certain changes relating to it in the BIA were proclaimed in force July 2008, the remaining amendments were not as their anticipated impact required further assessment. However, after years of limbo, the remaining amendments came into force on September 18, 2009. Here are the highlights of the key amendments to the BIA and CCAA. These amendments will be applicable to insolvency proceedings commenced on or after September 18, 2009.
Interim FinancingNow, for the first time in Canada, there will be a statutory basis under both the CCAA and BIA to allow debtors to borrow funds required to restructure and to secure such loans with priority charges on their assets. This type of financing, known as “debtor-in-possession” or "DIP" lending in the U.S., had become part of the Canadian practice despite the lack of express statutory authority. Nevertheless, the new interim financing provisions are a welcome addition to Canadian restructuring law, as there had been lingering debate as to the extent of the court’s jurisdiction to grant priority charges. Consistent with the practice as it had evolved, the court may now authorize interim financing and give the lender a priority over existing security. However, contrary to at least one controversial case, the charge may not secure pre-existing debts. On an application for interim financing, the factors the court must consider include not only the anticipated duration of the proceedings, and the debtor’s property and management, but also whether the debtor has the confidence of its lenders, and whether any creditor would be materially prejudiced as a result of the security to be granted. Canadian banks will want to watch developments in this arena closely since, now that the rules are codified, it is expected that the Canadian interim lending marketplace will expand. Even the Government of Canada, through Export Development Corporation, has formally entered into the interim financing fray by investing $450 million recently in a newly established $1 billion interim lending fund. With these legislative changes, it is clear that interim financing as a legitimate source of financing to distressed companies is here to stay in Canada. [BIA s.50.6; CCAA s.11.2] Disclaimer and Assignment of ContractsPrior to the new amendments, the BIA and CCAA lacked clear mechanics regarding the ability of reorganizing debtors to disclaim, reject or assign contracts. The new changes now provide considerable flexibility for a restructuring debtor to disclaim or to assign contracts. Both statutes require the approval of the trustee or monitor for the disclaimer or assignment of a contract. If the trustee or monitor provides its approval the debtor will notify the other party to the contract of the intended disclaimer. If the other party wishes to dispute the disclaimer, it must apply to the court within 15 days for an order that the contract should not be disclaimed. Otherwise, the agreement will be deemed disclaimed 30 days after the notice. Any damages arising from the disclaimer will be an unsecured claim in the insolvency proceedings. If the monitor or proposal trustee does not approve the disclaimer, the debtor must apply to the court for an order authorizing the disclaimer. The factors to be considered by the court in a disclaimer include the approval of the trustee, the prospects of a viable restructuring, and whether the disclaimer would create a significant financial hardship to the other party to the agreement. Several types of agreements are excluded from the disclaimer regime. These include the right to use intellectual property given by the debtor, eligible financial contracts, real property leases, collective bargaining agreements, and financing agreements. The exclusion of agreements relating to the use of intellectual property is of particular interest. If the debtor has granted rights to use its intellectual property (including exclusive use agreements), these rights cannot be disclaimed, provided that the party holding the rights continues to perform its obligations under the agreement. [BIA s.65.11; CCAA s.32] For the assignment of the debtor’s rights under a contract, the court will consider factors such as the ability of the assignee to perform the obligations, and the appropriateness of the assignment of the rights and obligations. The approval of the trustee or monitor is required. The court may not order the assignment unless all monetary defaults are remedied by a date fixed by the court. The assignment provisions specifically exclude contracts entered into after the date of bankruptcy, eligible financial contracts and collective bargaining agreements. These amendments are designed to give the debtor the ability to eliminate contracts which would prevent a viable restructuring, and assign contracts which add value to the restructuring, and to bring the Canadian legislation closer to practice in other countries. [BIA ss.84.1, 66(1.1), 146; CCAA s.11.3] Collective Bargaining AgreementsThere will be no power to disclaim or reject collective agreements in reorganizations. Collective agreements cannot be amended or changed during a CCAA case without the permission of the collective bargaining unit. There is a procedure for reopening a collective agreement, but it is deliberately difficult. The reorganizing business must apply to the court for an order to reopen negotiations.
The court may only issue the order if it is satisfied that:
(a) a viable plan cannot be made under the terms of the existing collective agreement; (b) the company has made good-faith efforts to renegotiate the provisions of the agreement; and (c) the failure to issue the order will likely result in irreparable damage to the company.
If all of those criteria (including irreparable damage) are met, then the most the court can do is direct a union to negotiate. This does not put unions at much risk. The court may require the company to make available to the bargaining unit whatever business and financial information the court considers relevant to the process. Presumably, the value in this process lies in the ability of the provincial Labour Relations Boards to impose sanctions or conditions on refusals to bargain in good faith. However, these new provisions do not appear to provide much leverage to reorganizing businesses.
[BIA s.65.12; CCAA s.35] Sale of AssetsExpress provisions dealing with asset sales during restructurings have been created, which include statutory criteria for court approval of such sales. Assets may not be sold outside the ordinary course unless the sale is approved by the court on notice to secured creditors who are affected by it. The court must consider, among other things: (a) whether the sale process was reasonable; (b) whether the monitor/trustee approved the sale process; (c) whether the monitor/trustee filed a report giving its opinion that the sale would be more beneficial to creditors than a sale or disposition under a bankruptcy; (d) the extent to which the creditors were consulted; (e) the effect of the proposed sale or disposition on the creditors and other interested parties; and (f) whether the consideration to be received for the assets is reasonable and fair. In addition, there is now a restriction on sales that is intended to protect employees and pensioners. The court may not approve a sale unless it is satisfied that the company “can and will” make the employee and pension plan payments that are now required for approval of a CCAA plan or BIA proposal. Time will tell whether this requirement will quell the practice of using CCAA proceedings as a means of liquidating company's business as a going concern - commonly referred to as a “liquidating CCAA” - which has been the subject of increasing criticism, particularly from unions and pensioner constituencies. There may also be issues as to how well these provisions deal with sales of assets in small cases or the sale of small assets in large cases. If a proposed sale is to a related person the court must be persuaded that good faith efforts were made to sell the assets to non-related parties and that the consideration offered is superior to what would be received under any other offer made in the sale process. [BIA s.65.13; CCAA s.36] National Receivers/Interim ReceiversThe amendments to the BIA significantly restrict the role of interim receivers and create a new class of “national” receiver. Interim receivers may still take possession of the property of the debtor, and exercise such control over the debtor’s property and business as the court determines appropriate. However, rather than the broad power to “take such other action” as the court might order, interim receivers will now only be permitted to take conservation measures and summarily dispose of perishable or rapidly depreciable property of the debtor. The time during which an interim receiver can exercise its powers has been limited to prevent interim receivers from becoming de facto receivers with broad powers of indefinite duration. Where an interim receiver is appointed in connection with a secured creditor’s enforcement, the interim receiver’s appointment will end when a national receiver or trustee in bankruptcy takes possession of the property; 30 days after the date of its appointment; or on a date fixed by the court, whichever is earlier. In a restructuring, the interim receiver’s appointment ends when a national receiver or bankruptcy trustee takes possession of the property; or the debtor’s proposal is approved by the court, whichever is earlier. While the role of the interim receiver has been carved back to ensure that its role is indeed “interim”, secured creditors can also now seek the appointment of a “national” receiver, which can exercise its powers across Canada. The court in the debtor’s principal place of business can appoint a national receiver to take control of the debtor’s property and business. However, consistent with existing rules for provincially-appointed receivers, a national receiver cannot be appointed until ten days after the secured party has given its Notice of Intention to Enforce Security, unless the court considers it appropriate to shorten that time. The court may order that fees and disbursements of the national receiver be subject to a charge over the debtor’s assets, but only if satisfied that the secured creditors who would be materially affected have reasonable notice and an opportunity to object. National receivers will be attractive to creditors because there is no need to seek separate appointments in each province where the debtor has assets. They will also enjoy the usual BIA protection against claims arising out of environmental damage and other circumstances existing before the time of their appointment. [BIA ss.47, 47.1, 243] International InsolvenciesCanada has adopted some but not all of the provisions of the UNCITRAL Model Law on Cross-Border Insolvency which was developed by the United Nations Commission on International Trade Law in a Working Group chaired by a member of Canada's Delegation to UNCITRAL. The Model Law has now been adopted in sixteen countries (including the United States (as Chapter 15 of the U.S. Bankruptcy Code), the United Kingdom, Australia, New Zealand, Mexico, Japan, Korea and Romania, among others). However Canada chose to adopt its own version of the Model Law which is much shorter. A number of features of the Model Law, such as access by foreign representatives to domestic Canadian proceedings, notification to foreign creditors, and provisions for relief pending the determination of an application for recognition of a foreign proceeding, have not been included in the Canadian amendments. Nevertheless, it is expected that Canadian courts will continue in their long-established tradition of cooperating with foreign administrations.
[BIA Part XIII ss. 267-289); CCAA ss. 44-55] Subordination of Equity ClaimsClaims arising from the ownership, purchase or sale of equity of the debtor are now subordinated to all other claims. A plan that provides for payment of equity claims cannot be approved by the court unless all other claims are to be paid in full. Further, equity claims cannot vote at creditors’ meetings without court approval and are not entitled to a dividend until all other claims are satisfied. [BIA ss.54(2)(d), 54.1, 60(1.7), 178(1)(e); CCAA ss.6(1), 6(8), 19(2)(d), 22.1, 124(3)] Eligible Financial ContractsThe global financial derivatives market continues to evolve at a dizzying pace. The definition of an “eligible financial contract” (known as an “EFC” within insolvency and restructuring circles) has been updated and relocated in legislative Regulations, in an effort to provide greater flexibility to accommodate future product developments. The changes clarify the carve-out of EFCs from reorganizational stay provisions, confirm the ability of counterparties to terminate EFCs in insolvency, and ensure that the new provisions allowing the disclaimer and assignment of contracts do not apply to EFCs. [BIA ss.65.1, 84.2; CCAA s.11.05(1); Budget Implementation Act, 2007 (S.C. 2007, c.29) Part 9] Critical SuppliersUnder the CCAA, the court now has the ability to declare a supplier to be a “critical supplier” if the court is satisfied that the supplier is critical to the company’s continuing operations. The court may order a critical supplier to continue to supply on terms and conditions that are consistent with its supply relationship or that the court considers appropriate. In doing so, the court must grant the critical supplier security over the debtor’s property, and may give security priority over other secured creditors. The application must be made by the debtor, on notice to the secured creditors who are likely to be affected by the security. Suppliers have often complained of the lack of a “Chapter 11-style” critical supplier designation where suppliers can be paid their pre-filing claims as condition of post-filing supply. While the new CCAA provisions leave open the possibility of the court ordering the payment of pre-filing debts as part of the terms of continued supply, the provisions certainly appear to provide more opportunity for debtors to compel continued supply from unwilling suppliers than for suppliers to obtain court-sanctioned preferential payment on their pre-filing accounts. [CCAA s.11.4] Professional ChargesThe new amendments codify the current practice of permitting court-ordered charges on a debtor’s property to secure payment of professional fees and costs. The court is now expressly permitted to create a lien on the debtor’s property to secure payment of the fees and expenses of financial, legal and other experts engaged in the restructuring process. This includes BIA receivers and proposal trustees, as well as, CCAA monitors and their respective advisors. The amendments also provide for a priority charge to cover the costs of financial, legal or other experts engaged by any “interested person”, provided that the court is satisfied that the security or charge is necessary for the “effective participation” of the interested person in the proceedings. It will be interesting to see how broadly the courts interpret and apply this new funding provision, and whether it accelerates the development of unsecured creditors’ committees in Canada. [BIA s.64.2; CCAA s.11.52] DirectorsNew provisions give the court the authority to remove or replace directors who are considered to be impeding a debtor’s restructuring. The court may remove any director of a debtor if it is satisfied that the director is "unreasonably impairing", or is likely to unreasonably impair, the possibility of a viable restructuring, or if the director is acting or is likely to act “inappropriately” as a director. The court may replace any director who is removed for those reasons. These provisions will give interested stakeholders a powerful tool in the reorganization process. The amendments also give the court the authority to provide for a priority charge over the assets of the debtor in favour of any director or officer in order to indemnify them against obligations and liabilities incurred as a result of being a director or officer. The court cannot make such an order if protection is available on commercially reasonable terms by way of insurance. The priority charge will not apply where the liability of the director or officer results from gross negligence or wilful misconduct. [BIA ss.64, 64.1; CCAA ss.11.5, 11.51] Protection for Employees in RestructuringWEPPA came into force last year with additions being made in January of this year. Those amendments provided protections to employees whose employers have become bankrupt or have been placed in receivership. The existing protections have now been extended to reorganizations. Specifically, BIA proposals and CCAA plans must provide for the payment of claims for outstanding wages (generally up to $2,000 per employee) and unpaid pension contributions immediately after court approval of a plan unless, in the case of pension contributions, the parties to the pension plan have entered into an agreement that is approved by the applicable pension regulator. [BIA ss.1(3), 2, 67(3), 81.3(1),1.4(1), 136] Regulatory Body StayIt has long been an issue as to whether the stay provisions under the BIA and in Initial Orders made under the CCAA - which restrain creditors and other third parties from enforcing their rights against the insolvent company - can prevent regulators and other governmental bodies from carrying out their duties. Regulatory bodies are not prohibited from investigating or prosecuting a debtor for breaches of applicable laws. However, stays under the CCAA and BIA will prevent regulatory bodies from enforcing their rights as creditors. In addition, the court may order a stay of proceedings by or before a regulatory body if satisfied that a viable proposal could not be made and that such a stay would not be contrary to the public interest. The effect of these amendments is that insolvent companies will still have to meet their responsibilities under labour, health and safety, securities, environmental, and other laws and will continue to be subject to prosecution for any offences that they have committed. The term “regulatory body” is quite broad and includes any body that is involved in the enforcement or administration of federal or provincial laws. The definition can also be expanded by Regulation to include non-governmental bodies. [BIA s.69.6; CCAA s.11.1] Shareholder Approval in RestructuringsThe courts have been given the jurisdiction, when approving a BIA proposal or CCAA plan, to amend the debtor’s corporate documents to reflect the terms of the plan. These amendments expressly dispense with the other corporate law requirements, such as the need to hold a shareholders’ meeting to seek approval for such changes. The courts have also been given the authority to approve the sale of all or substantially all of a debtor’s assets in BIA and CCAA proceedings without the shareholder approval that would be required outside of an insolvency even if the sale is outside of the ordinary course of the debtor’s business. [BIA ss.59(4), 65.13(1); CCAA ss.6(2), 36(1)] |