The 2019 Legislative Amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act

15 novembre 2019 | Eduard Popov

( Disponible en anglais seulement )

On November 1, 2019, major amendments to the Bankruptcy and Insolvency Act (Canada) (the “BIA”) and the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) included in Bill C-97[1] and Bill C-86[2] came into force.

The Government of Canada has stated that one goal of these reforms is to make insolvency proceedings more transparent, fair and accessible for pensioners and workers.[3]

However, these amendments are farther reaching and include, among other things: the statutory introduction of the duty of good faith in insolvency proceedings; expansion of director liability; limitation of relief in Initial Applications under the CCAA; disclosure of economic interests; and greater protections for intellectual property users. The following is an overview of the significant changes.

Changes to the CCAA and BIA

Duty of Good Faith (BIA s. 4.2, CCAA s. 18.6)

 These amendments impose a duty of good faith on all “interested persons” in insolvency proceedings, failing which a court may, on application, make any order it considers appropriate.

The requirement to act in good faith has already been applicable to trustees, monitors and receivers and is a pre-condition to various forms of relief under the BIA and the CCAA. Additionally, the Supreme Court of Canada has recognized a common law duty of good faith as a “baseline consideration”[4] in insolvency proceedings and an “organizing principle” in contractual dealings.[5]

While these amendments expand the duty to all proceedings under insolvency legislation, the concept of “good faith” has resisted a stable and coherent definition as the jurisprudence on the matter has been piecemeal[6] and unsettled[7]. Thus, this lack of clarity is likely to contribute to more litigated disputes.

Intellectual Property Usage Rights (BIA s. 72.1(1)-(2), 246.1(1)-(2), CCAA s. 36(8))

Bill C-86 aims to modernize Canadian intellectual property legislation and offer greater protections to intellectual property users. These amendments broaden existing intellectual property protections to include BIA proposals, receiverships and CCAA proceedings.

Specifically, the BIA and the CCAA amendments allow intellectual property users to preserve their usage rights when intellectual property is sold or disposed of in insolvency proceedings.

Additionally, the amendments to the BIA extend these rights to circumstances where the agreement relating to such property rights is disclaimed or cancelled.

An area of contention arising out of these amendments will revolve around how they affect intellectual property usage rights under contracts that only partially deal with intellectual property license grants. For example, will these agreements be disclaimed while the portions of the agreement dealing with intellectual property be kept alive? Look out for our upcoming communique where we will be discussing these intellectual property amendments in greater detail.

Changes specific to the BIA

Expansion of Director Liability (BIA s. 101(1))

Reforms to the BIA expand the liability of directors. Prior to November 1, 2019, if a corporation paid dividends or bought back and cancelled shares twelve (12) months prior to the corporation becoming bankrupt, the court could, upon certain conditions being met, make an order against the directors of the corporation requiring repayment of the said amounts.

After November 1, 2019, this ‘look-back’ provision is expanded to include the payment of termination and severance pay and incentive and other benefits to a director, an officer or any person who manages or supervises the management of the business and affairs of the corporation. The purpose of this amendment is to discourage executives from taking actions that undermine the financial interests of workers and pensioners.[8]

Importantly, the amendments place the onus on the directors to show the following: (i) the payment did not occur when the corporation was insolvent or that the corporation was rendered insolvent by it; (ii) the payment was not conspicuously over the fair market value of the consideration received by the corporation; (iii) the payment was not made outside of the ordinary course of business; and (iv) the directors did not have reasonable grounds to believe any of the above.

Property of the Bankrupt (BIA s. 67(1)(b.3))

Under the BIA, there are certain assets of a bankrupt that are beyond the reach of creditors. These include, among others, registered retirement savings plans, registered retirement income funds, and now – post November 1, 2019 – registered disability savings plans (“RDSPs”).

The Government of Canada has stated that this amendment will preserve a financial cushion for society’s most vulnerable and will save disabled persons the time and resources necessary to defend the exempt-status of their RDSPs in court.[9]

Changes specific to the CCAA

Limitations to Relief Granted in Initial Applications (CCAA s. 11.001 and 11.02(1))

The 2019 amendments to the CCAA limit the relief that the court may grant on an Initial Application to what is “reasonably necessary for the continued operations of the debtor company in the ordinary course of business.”[10]

Importantly, the amendments also shorten the stay period granted on an Initial Application from thirty (30) to ten (10) days.

Lastly, when an application for interim financing is made at the same time as an Initial Application, the court must be satisfied that the terms of the loan are limited to what is reasonably necessary for the continued operations of the debtor company in the ordinary course of business.

These changes may impact the courts’ approach to granting debtor-in-possession (“DIP”) financing and key employee retention plans (“KERPs”). Historically, courts have taken an expansive approach to what factors they would consider on an application for DIP financing. Likewise, in granting KERPs, courts have given a great deal of deference to the business expertise of the management of a debtor. As such, the courts will need to resolve the expansive approach taken in the case law with the limiting provisions of the amendments.

Disclosure of Financial Information (CCAA s. 11.9(1))

After November 1, 2019, a court may, on application by any “interested person”, make an order requiring a creditor to disclose any aspect of its “economic interest” in the debtor company.

“Economic interest” is defined expansively to include:

  1. a claim, an eligible financial contract, an option or a mortgage, hypothec, pledge, charge, lien or any other security interest;
  2. the consideration paid for any right or interest, including those referred to in paragraph (a); or
  3. any other prescribed right or interest.

The intent behind this amendment is to enhance the fairness of negotiations in insolvency proceedings by eliminating informational asymmetries and procedural advantages enjoyed by creditors.[11]

During the Government of Canada’s public consultations, these amendments were challenged on the basis that they would discount the claims of creditors, undermine the marketability of bonds or other debt and hinder creditors’ right to vote.[12]

Parliament has sought to soften these concerns by requiring involuntary disclosure only when a court has made an order to that effect. The court must consider whether: (i) the monitor approves of the proposed disclosure; (ii) disclosure would undermine the viability of a compromise or an arrangement; and (iii) such disclosure would materially prejudice an “interested person.”

Notably—and surely to the consternation of affected creditors—the amendments indicate that this list is not exhaustive and the court may consider other factors. This gives discretion to the court to determine the proper balance of the interests involved.

It will be interesting to see how this latest round of amendments will be implemented and integrated into insolvency proceedings moving forward.

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[1] Budget Implementation Act, 2019, No. 1, SC 2019, c.29. Available at: https://www.parl.ca/DocumentViewer/en/42-1/bill/C-97/royal-assent.

[2] Budget Implementation Act, 2018, No. 2, SC 2018, c.27. Available at: https://www.parl.ca/DocumentViewer/en/42-1/bill/C-86/royal-assent.

[3] “Investing in the Middle Class: Budget 2019,” Government of Canada, March 9, 2019. Available at: www.fin.gc.ca.

[4] Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 at para 70.

[5] Bhasin v. Hrynew, 2014 SCC 71 at para 93.

[6] Ibid at paras 32-33, 59.

[7] Ibid at para 8.

[8] Senate of Canada, Proceedings of the Standing Senate Committee on Banking, Trade and Commerce, Evidence, No 56 (8 May 2019). Available at: https://sencanada.ca/en/Content/Sen/Committee/421/BANC/56ev-54778-e.

[9] Ibid.

[10] Section 11.001 of the CCAA.

[11] Supra note 4.

[12] Ibid.

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