Canadian Bankruptcy and Insolvency Law: An Overview

This article provides a comprehensive overview of Canadian bankruptcy and insolvency law, drawing from various sources to offer a detailed understanding of the legal framework, procedures, and key considerations for stakeholders.

I. Statutory Framework

There are three federal statutes that govern insolvency law in Canada:

• The Bankruptcy and Insolvency Act (BIA)
• The Companies' Creditors Arrangement Act (CCAA)
• The Winding-Up and Restructuring Act (WURA)

The BIA, along with its regulations, is a self-contained code that deals with the liquidation of assets and the restructuring of debts of individuals, partnerships, corporations (excluding certain types), and other business entities meeting specific residency and debt requirements. The BIA also covers receiverships, where a third party manages the insolvent entity's assets.

The CCAA focuses on the restructuring of debts for corporations (excluding certain types) and income trusts that meet specific residency and higher minimum debt requirements than the BIA.

The WURA addresses the liquidation and restructuring of specific entities like banks and trust companies, essentially those excluded from the BIA and CCAA.

II. Key Features of the BIA, CCAA, and WURA

Of the three insolvency statutes, the BIA is the most comprehensive, providing substantive provisions dealing with:

• Stays of proceedings
• Distributional priorities
• Fraudulent transfers
• Sale of assets
• Treatment of contracts
• Interim financings
• Cross-border proceedings
• Penalties and sanctions against debtors and their directors

Restructurings under the BIA are by way of 'proposals' to creditors. These proposals bind all affected creditors, if approved by the requisite double majority (two-thirds of proved claims and more than 50 per cent of creditors per class) and subsequently by the court.

The CCAA is more flexible than the BIA, granting courts more discretion in assisting restructuring corporations. Unlike the BIA, the CCAA has no limit to the maximum cumulative length of a stay of proceedings because the court has significant discretion on the scope of the stay of proceedings beyond what is available under the BIA. Restructurings under the CCAA are done through a 'plan of compromise or arrangement'. Such a plan, if approved by the requisite double majority (the same as under the BIA) and subsequently by the court, binds all affected creditors.

The WURA is less structured than the BIA or the CCAA and applies primarily to financial institutions. The banking system in Canada is very stable and, therefore, there are few proceedings under WURA.

III. Policy Objectives

With respect to restructurings, whether it is the debts of an individual or a business entity, the objective is to provide a debtor in financial difficulty the time and opportunity to restructure and develop a fresh arrangement with creditors with a view to avoiding a bankruptcy liquidation. The goal is to keep debtors who are in financial difficulty operating and protected from creditors, to allow the debtor to stabilise operations and develop a restructuring plan that may then be put to its creditors for consideration. If the requisite majorities approve the plan, it binds all affected creditors and the debtor emerges from bankruptcy protection and continues its (restructured) operations.

IV. Insolvency Procedures

A. Reorganising under the BIA

To reorganise under the BIA, an insolvent debtor must have liabilities of at least C$1,000, carry on business in Canada and be insolvent. A BIA reorganisation is commenced by a debtor either lodging a proposal to creditors with a proposal trustee or filing what is known as a notice of intention (NOI) to make a proposal under the BIA. If a NOI is filed, the debtor has 30 days to file a proposal, which may be extended by a court order for up to five additional months, in periods of no more than 45 days at a time. If the debtor fails to file a proposal by the end of the final period, or if the proposal is rejected, then the debtor is deemed to have made an assignment into bankruptcy. A stay of proceedings is automatically imposed by statute upon a proposal or NOI being filed.

B. Bankruptcy Liquidation under the BIA

A bankruptcy liquidation commences with either an assignment into bankruptcy by the insolvent debtor or an application for a bankruptcy order by one or more creditors who are owed at least C$1,000, where the debtor is insolvent and has committed an act of bankruptcy. Once a bankruptcy order or assignment is made, a trustee is appointed over the assets and is charged with collecting and liquidating the assets of the bankrupt with a view to distributing proceeds to creditors. A meeting of creditors takes place shortly after the bankruptcy, and inspectors may be elected by the creditors to oversee and provide instructions to the trustee on how the proceeding is conducted. Once the assets are liquidated, the trustee distributes the proceeds to creditors who have filed proofs of claim based on the priorities scheme set out in the BIA.

C. Reorganising under the CCAA

To reorganise under the CCAA, a company must carry on business in Canada, have total liabilities exceeding C$5 million and be insolvent. CCAA proceedings are commenced with a court application by the reorganising debtor for what is known as an initial order, which establishes the proceeding and sets out the general parameters, including stays of proceedings, provisions that prohibit creditors from enforcing claims against the debtor, provisions that prohibit contracting parties from terminating contracts with the debtor, interim operational matters for the debtor, the appointment of a monitor, and interim financing. Under the new CCAA amendments, after the 10-day stay of proceeding, the proceeding may be extended at the discretion of the court for any additional period of time.

In the past, reorganisations have taken the form of the development of a plan of compromise or arrangement, consisting of a proposal to creditors to compromise claims. The time frame in which a debtor has to file a plan is at the discretion of the court. Creditors are grouped into classes based on commonality of interest for the purposes of voting and distribution under the plan. A majority in number, representing two-thirds in value of the claim of each creditor class, must approve the plan, as well as the court. If they do, then the plan will be binding on all creditors in the class. The CCAA is silent on the time frame for seeking court approval.

D. Proceedings under the WURA

Under the WURA, depending on the circumstances, a debtor, a creditor, a shareholder or the Attorney General of Canada may commence a proceeding. A stay of proceedings may be sought from the court by the debtor, creditor, contributory, liquidator or the original applicant. The remedy is discretionary. Upon the making of a winding-up order, an automatic stay is imposed. The WURA provides no restrictions on the amount of time a debtor has to restructure or any restriction on the discretion of the court to grant or restrict the amount of time. There is also no time frame for seeking court approval.

V. Stays of Proceedings

In proceedings under the BIA, CCAA and WURA, any affected party may oppose or seek to lift the stay of proceedings. To do so, creditors must prove that they are likely to be materially prejudiced by the continuance of the stay, or it is equitable on other grounds that the stay be lifted. Unless there are compelling reasons to lift the stay, courts are normally reluctant to do so, especially at the outset of the proceeding, so that the debtor has time to attempt to restructure.

VI. Receiverships

Receiverships can be commenced either under the BIA or under provincial legislation. As an equitable remedy, receiverships take on many forms but typically a receiver is appointed either privately pursuant to a security agreement or by way of court order, and is given certain powers to either operate a business, seize and liquidate assets, or sell a business as a going concern, with a view to distributing the proceeds of sale to the creditors of the debtor. Receiverships are a very common remedy for dealing with insolvency in Canada and a useful tool for monetising the business or assets of an insolvent debtor.

VII. The Intersection of Insolvency Law and Commercial Leasing

Canadian Bankruptcy and Insolvency Law for Commercial Tenancies offers specialized, practical information focusing on the key issues that are relevant in a bankruptcy and insolvency scenario involving a commercial landlord and tenant. Bish clearly and cogently analyzes the inherent legal tensions that arise when insolvency law and commercial leasing intersect, giving readers unprecedented insight into this intricate area of the law.

After providing a practical overview of the steps involved in commencing insolvency proceedings – complete with a description of model court orders and comeback clauses – the author delves into the statutory and common law as they relate to issues of particular importance to landlords and tenants when commencing proceedings, including:

• Stays of proceedings
• Rights of occupation and the obligation to pay occupation rent
• Restrictions on interference with, and positive obligations to cooperate with, the debtor/court officer
• The paradigm put in place for the disclaimer, resiliation, repudiation and termination of contracts
• The treatment of fixtures
• Statutory and court-ordered priority charges that may affect landlords

He also provides helpful examinations of a wide range of topics, such as:

• The extent to which insolvent tenants can deviate from lease contracts to the detriment of landlords
• Inventory liquidation sales and the use of agents
• Standard provisions that appear in sale guidelines outlining how a liquidation shall be conducted
• The terms that are included in orders approving liquidations, including examples from liquidations of well-known companies
• The circumstances which trigger the landlord's duty to mitigate, and the calculation of a landlord's claim at common law, in bankruptcy, in Bankruptcy and Insolvency Act proposal proceedings, in Companies' Creditors Arrangement Act proceedings and in receiverships
• The basics of classification of creditors and voting in bankruptcy and insolvency proceedings
• Dealing with the uncommon scenario of a commercial landlord's insolvency and its impact on the tenant

Canadian Bankruptcy and Insolvency Law for Commercial Tenancies contains useful tables and charts, including a summary of the substantive issues dealt with in model orders across Canada and a summary of the provincial statutes governing the assignment of commercial leases by trustees in bankruptcy.

VIII. Key Chapters in "Canadian Bankruptcy and Insolvency Law for Commercial Tenancies"

This book provides a comprehensive overview of various aspects of Canadian bankruptcy and insolvency law. Here's a glimpse into the key chapters:

1. Overview of Canadian bankruptcy and insolvency law: Provides a general introduction to the legal framework.
2. Jurisdiction and judicial discretion: Examines the powers and limitations of courts in insolvency matters.
3. The intersection of insolvency law and commercial leasing: Discusses constitutional considerations and privity of estates and of contract.
4. Commencement of proceedings and initial orders: Details the steps involved in starting insolvency proceedings.
5. The binding nature of contracts: Explores the extent to which contracts can be altered or terminated in insolvency.
6. Inventory liquidation sales and the use of agents: Covers the legal aspects of selling off inventory.
7. Sales and assignments of leases: Addresses the transfer of leases during insolvency.
8. Calculation and priority of landlord claims: Explains how landlord claims are calculated and prioritized.
9. Classification and voting of landlord claims: Discusses how landlords are classified and how they can vote in insolvency proceedings.
10. Insolvency of a commercial landlord: Deals with the specific issues that arise when a landlord becomes insolvent.

IX. Overview of Restructuring and Insolvency Activity

While there was a small increase in insolvency filings (2.4 per cent), the number of business insolvency filings actually fell by 0.8 per cent and Canada continues to enjoy low levels of business insolvencies. However, the number of consumer insolvency filings rose by 2.5 per cent, underscoring continuing concern about the level of household debt remaining very high.

The Bank of Canada has noted in its most recent monetary report that trade tensions and elevated uncertainty have been important factors weighing on the Canadian economy.

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