Amendments to Canadian Insolvency Statutes: BIA and CCAA

December 12, 2019


The Bankruptcy and Insolvency Act (Canada) (“BIA“) and the Companies’ Creditors Arrangement Act (Canada) (“CCAA“) comprise the statutory framework for individual and corporate insolvencies, restructuring, and bankruptcies in Canada. On November 1, 2019, the BIA and CCAA (the “Acts”) were both amended to achieve better accountability and transparency in insolvency proceedings.

Disclosure of Economic Interests

The CCAA was amended to allow interested persons to apply for a court order requiring a person to disclose any “economic interest” in the debtor company. An “economic interest” includes a claim, eligible financial contract, an option, a mortgage, charge, lien, other security interest, the consideration paid for any right or interest, or any other prescribed right or interest. The court must consider whether the information sought would enhance the prospects of a compromise or arrangement for the debtor company and whether any interested person would be materially prejudiced by the disclosure.

The purpose of this may be aimed at leveling the playing field in the administration of estates. Possible scenarios where disclosure might be particularly important are (i) where claims are traded at discount values to purchase blocking votes or (ii) where related parties or parties with undisclosed collateral interests bid on assets of the insolvent estate.

Pension Funding and Obligations

To protect the interests of retirees and pensioners, the Acts were amended to require that funds earmarked for registered disability savings plans be added to funds in RRIF plans and RRSP so that they are exempt from seizure under the BIA. The Canada Business Corporations Act was simultaneously amended to require that directors take into account the financial interests of retirees and pensioners in board deliberations of CBCA companies on the eve of insolvency. Provincial business corporations statutes are expected to be similarly amended.

Director and Officer Compensation Clawbacks

The amendments expose directors to more scrutiny on the eve of insolvency. The courts may “look back” into payments (including termination pay, severance pay, incentive and other benefits) made to directors, officers, and other managing personnel in the year preceding the initial bankruptcy event. If the payments were made when the corporation was insolvent or rendered the corporation insolvent, exceeded the fair market value of the consideration received by the corporation, or were outside the ordinary course of business, the court may issue judgments against the directors personally, as may be appropriate.

Procedural Changes

Stays of proceedings will be granted if “reasonably necessary” for the continued operations of the debtor companies. The initial stay period is reduced from 30 days to 10 days. As well initial relief in first day orders will only be granted if “reasonably necessary”. These amendments will help ensure that orders granted at the commencement of insolvency do not over-reach, and are fair to other creditor interests. Certain relief like new funding (DIP financing orders) and pre-baked solicitation proceedings for the sale of assets, which may prejudice stakeholders who had no notice of insolvency proceedings, may now be challenged earlier.

Intellectual Property Rights

Intellectual property (“IP“) licensees in Canada can now maintain their use of IP during and following the commencement of insolvency proceedings. This will include protection of such rights when IP is sold in an insolvency proceeding. The IP affected is not specifically defined in the Acts, so other Canadian caselaw and statutes will fill that need.

Duty of Good Faith

In Bhasin v Hrynew, the Supreme Court recognized a general duty of honest performance in contractual dealings which has been broadly applied. Canadian courts must now consider good faith and disclosure of economic interests to enhance their jurisdiction in restructuring matters. Parliamentary debates preceding the amendments suggest that they were intended to protect the public from the effects of high-profile corporate bankruptcies like Nortel and Sears where many Canadian employees lost their pensions. A statutory duty to act in good faith will now apply to all participants in Canadian insolvency proceedings. Although debtors previously had a duty to act in good faith, the statutory duty now applies to all parties. This amendment is consistent with developments in the common law. In Century Services Inc v Canada (Attorney General) the Supreme Court of Canada stated that “the requirements of appropriateness, good faith and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority”. A statutory duty of good faith is also consistent with British and American insolvency statutes and will therefore be useful in cross-border proceedings.

Capturing Bad Corporate Behaviour

As a significant actor on the global insolvency stage, Canada’s legislation must resonate with concerns about unfairness by or to stakeholders in Canadian proceedings. For example, the US Bankruptcy Code includes a “hidden interest” provision which requires a trustee seeking to employ a bankruptcy professional or consultant to disclose all of the consultant’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The statutory duty of good faith together with enhanced powers given to our courts to require creditors to disclose their real economic interests will create a more transparent and accountable insolvency process for the benefit of interested parties, including the goals of Parliament to better protect Canadian wage earners and pensioners