88-16E
BANKRUPTCY LAW UPDATE
Prepared by:
Margaret Smith
Law and Government Division
Reviewed 18 May 1999
TABLE OF CONTENTS
ISSUE DEFINITION
BACKGROUND AND ANALYSIS
A. Wage Claims
B. Secured Creditors and Receivers
C. Commercial Proposals
1. Stays of Proceedings
2.
Liability of Directors and Stays of Action against Directors during
Reorganizations
3.
Protection for Creditors
4.
Voting
5.
Approval by the Court
6.
Limitations to Certain Rights
D. Consumer Proposals
E. Consumer Bankruptcies
1. Summary Administration
2.
Automatic Discharge
3.
Application for a Discharge from Bankruptcy
4.
Property Exempt from a Bankruptcy
5.
Payment of "Surplus Income"
6.
Family Support Claims
7. Non-dischargeable Debts
F. Crown Priority
G. Unpaid Suppliers
H. Securities Firms
I. International
Insolvencies
J. Companies'
Creditors Arrangement Act
CHRONOLOGY
SELECTED REFERENCES
BANKRUPTCY LAW UPDATE*
ISSUE DEFINITION
Over the last two decades
there have been many attempts to amend Canadas bankruptcy laws.
Six omnibus reform bills were introduced in Parliament between 1975 and
1984, none of which became law. As well, no fewer than three different
advisory committees have made recommendations for change. In 1988, the
then Department of Consumer and Corporate Affairs published proposed revisions
to eight key areas of the Bankruptcy Act. Many of these proposals
made their way into Bill C-22, which was introduced in the House of Commons
on 13 June 1991 and received Royal Assent on 23 June 1992.
The Bankruptcy Act,
which after the passage of Bill C-22 became known as the Bankruptcy
and Insolvency Act (the "Act" or the "BIA"), was
further amended with the enactment of Bill C-5 on 25 April 1997.
This paper outlines the changes
to Canadas bankruptcy laws made under Bill C-22 and Bill C-5.
BACKGROUND AND ANALYSIS
The movement in favour of
revisions to the Bankruptcy Act began in 1970 with the publication
of the Report of the Study Committee on Bankruptcy and Insolvency Legislation
(known as the Tassé Report). The Committee urged the adoption of a revised
statute in light of the many economic and social changes since the passage
of the Bankruptcy Act in 1949. Bill C-60 was introduced in 1975
to implement the Report's recommendations. The Senate Committee studying
the bill subsequently recommended many changes and the bill was allowed
to lapse. Three more bills introduced in the Senate between 1978 and 1979
also died on the Order Paper. The Government introduced Bill C-12 in the
House of Commons in 1980; however, second reading was delayed until 1983
and Parliament was dissolved before the Commons Committee completed its
hearings. Bill C-12 was re-introduced as Bill C-17 in 1984, only to die
on the Order Paper after second reading.
In June 1988, the Government
published a document entitled "Proposed Revisions to the Bankruptcy
Act." In this document, the Government opted for reforms to certain
key areas of bankruptcy law rather than to continue to present a completely
new statute containing far-reaching reforms.
Bill C-22 followed this lead
and brought forward changes to selected areas of bankruptcy law. Among
these were: wage claims, secured creditors and receivers, commercial reorganizations,
consumer proposals, consumer bankruptcies, Crown priority and unpaid suppliers.
Bill C-22 required that the
BIA be reviewed by a parliamentary committee after three years.
In anticipation of the review,
the government set up the Bankruptcy and Insolvency Advisory Committee
(BIAC). The BIAC, which was composed of government and private-sector
participants, examined various areas of bankruptcy law and made a number
of recommendations for change. Many of the BIAC recommendations made their
way into Bill C-5.
Bill C-5 refined many aspects
of bankruptcy law and contained new provisions relating to international
insolvencies and securities firm insolvencies. The bill also made significant
changes to the Companies Creditors Arrangement Act (CCAA).
In the following text, a
number of key areas of the BIA will be outlined. In some cases, previous
attempts at reform will also be reviewed.
A.
Wage Claims
A major new revision in Bill
C-22 was the proposed creation of a wage claim payment program, a fund
to provide direct compensation for unpaid wages to terminated employees
of companies which are bankrupt, being liquidated, or in receivership.
Under the Bankruptcy Act,
unpaid wage claims in a bankruptcy were preferred to a maximum of $500
over the claims of general creditors. This form of priority status for
wage earners was largely illusory since secured creditors ranked ahead
of them in any distribution of property. Furthermore, even if moneys were
available, they were normally paid some time after the date of bankruptcy.
Another problem was that the amount of the priority was inadequate in
light of current wage levels.
The idea for a government-administered
fund dates back to 1975 and the first attempt to amend the Act. Bill C-60
had proposed to implement a Tassé Report proposal by conferring a "super
priority" status on unpaid wage claims up to $2,000, binding secured
creditors as well as general creditors. Secured creditors objected to
the proposal as a potentially serious dilution of their protected status
and the Senate Banking, Trade and Commerce Committee, was of the opinion
that super priority status for wages would be detrimental to a borrower's
ability to obtain financing, especially in labour-intensive industries.
Instead, the Committee recommended the creation of a government wage protection
fund, made up of contributions from employers and employees, out of which
outstanding wages of employees to a maximum of $2,000 could be paid immediately
upon bankruptcy.
In 1980, Mr. André Ouellet,
then Minister of Consumer and Corporate Affairs, appointed a small task
force of bankruptcy experts to investigate the problem anew. The Landry
Committee reported in 1981 that it was unable to determine the seriousness
of the problem of unpaid wages, in view of the scarcity and incompleteness
of reliable data on the number and value of unpaid wage-earner claims.
The evidence they were able to collect, however, did verify that a problem
existed. Committee members noted that five West European countries --
the U.K., France, West Germany, Belgium and Denmark -- had all introduced
a wage-earner protection scheme; this was also their recommended solution
for Canada. They believed, however, that a permanent legislative solution
could not be formulated until the size of the problem had been determined,
and federal and provincial policies coordinated. Their final recommendation
was an interim three-year solution during which unpaid wages should be
covered by the Consolidated Revenue Fund up to a maximum of $1,000. To
arrive at a permanent comprehensive wage protection system, the Committee
recommended that federal-provincial meetings should take place.
The Committee's recommendations
were not immediately accepted. The next bankruptcy bill, in 1984, had
basically the same provisions for wage earners as Bill C-12 in 1980. In
the event of a bankruptcy or receivership, Bill C-17 provided that a claim
for wages up to a maximum of $4,000 would rank in priority over the claims
of all secured creditors. The then Minister did not endorse the idea of
a wage protection fund because of the lack of statistical data on the
cost and the fear it would operate as a disincentive to employers to pay
wages on time.
The Progressive Conservative
Minister Michel Côté decided to proceed with bankruptcy reform by amending
the existing Act rather than by enacting sweeping reforms through a new
statute. In March 1985 he appointed an Advisory Committee, chaired by
Gary Colter of Peat Marwick Limited, to examine the bankruptcy system,
assess possible reforms and recommend amendments. The Committee tabled
its report in January 1986. It made the following recommendations with
respect to wage-earner protection.
1. A fund should be established
for the purpose of paying the arrears of wages of employees whose
employers have been either declared bankrupt or put into receivership.
Such a fund would be the best method of ensuring that employees of
insolvent companies were promptly paid their arrears of wages.
2. The wage earner protection
fund should be financed by contributions from employers and employees.
3. Employees related
to the insolvent employer should not be entitled to any payments out
of the fund.
4. Employees should
be entitled to be paid the following:
5. The Fund should be
administered by the Unemployment Insurance Section of the Department
of Employment and Immigration.
6. Payments to employees
should be made by the trustee or receiver.
7. The fees and expenses
of the trustee or receiver resulting from processing the special preferred
claims of the wage earners should also be paid by the fund.
8. Any amounts paid by
the fund should be subrogated as special preferred status claims under
section 107 of the Bankruptcy Act ranking immediately after
the costs of administration.
9. Any amounts due to
employees for severance pay should remain as unsecured claims ranking
with other unsecured claims against the employer.
The Department's June 1988
proposals differed from these recommendations of the Colter Committee
in several respects. First of all, the program was to be financed entirely
by the federal government rather than by employer and employee contributions.
The Department also proposed that the Superintendent of Bankruptcy of
the Department of Consumer and Corporate Affairs, rather than the Unemployment
Insurance Section of Employment and Immigration, administer the fund.
The Department accepted the
Colter Report's recommendation on monetary limits. The fund was to guarantee
90% of unpaid wages and vacation pay earned in the previous six months,
to a maximum of $2,000, and up to $1,000 for arrears of expenses incurred
on behalf of the employer.
The purpose of a wage-earner
protection program was to alleviate the immediate hardship experienced
by unpaid wage earners upon the insolvency of their employer. Through
expeditious payment of claims within prescribed limits, employees could
meet their most immediate expenses until there was a cash flow from alternative
employment or unemployment insurance. The certainty and the timeliness
of a wage-earner protection program was lacking in the super priority
proposal of previous bills. The available assets of the bankrupt might
not have covered the amount claimed and there might have been a significant
delay in payment pending the sale of the bankrupt's assets. In addition,
serious difficulties might have arisen in the administration of the super
priority proposal since it would have been a complicated task to allocate
the burden of paying claims among the various secured creditors. It has
also been argued that the creation of a super priority would have imposed
an unexpected burden on a secured creditor and reduced the credit available
to a labour-intensive industry.
The Report of the Advisory
Council on Adjustment (the de Grandpré Report) endorsed the creation
of a national wage earner protection fund to make payments of up to $4,000
to cover unpaid amounts owing to employees. The Council was of the opinion
that the federal government should assume this obligation when the employer
cannot pay. The Council went on to recommend that in the event the wage
earner protection fund is not created, claims of wage earners should be
given priority over all other claims in the disposition of assets of insolvent
employers.
A working document prepared
for, but not endorsed by, the Economic Council of Canada, favoured an
expanded unemployment insurance program rather than the proposed protection
fund. The author suggested that if UI eligibility was based on loss of
wages, rather than loss of employment, it would encourage adjustment through
the active involvement of employees. A wage protection fund, on the other
hand, would be like a subsidy paid to the debtor firm and would enter
into its adjustment decisions as a possible source of wage payments.
Bill C-22, as introduced
at first reading, would have established a wage claim protection program
pursuant to a new statute, the Wage Claim Payment Act ("WCP Act").
The bill would have created a fund, financed by contributions from employers,
from which employees could claim unpaid wages, vacation pay and salesperson's
expenses in the event that an employer had become bankrupt, had been liquidated
or had gone into receivership.
The amount of the benefit
to be paid out of the fund would have been set at 90% of an employee's
unpaid wages and vacation pay earned within the preceding six months,
up to a maximum of $2,000 and 90% of salesperson's expenses unpaid during
the same period, up to a maximum of $1,000. Pension contributions, severance
and termination pay would not have been included. The program would have
been administered by the Superintendent of Bankruptcy and benefits would
have been paid out of the Consolidated Revenue Fund.
The program would have been
financed by a payroll tax on employers equal to 0.024% of an employee's
weekly insurable earnings under the Unemployment Insurance Act.
The tax, which would have been imposed as of 1 January 1992, would
have been collected jointly with the unemployment insurance program and
was expected to cost employers about 10 cents per employee per week.
The concept of a wage protection
fund was generally well received; however, the method of financing the
fund was not. Business and institutions such as municipalities, hospitals,
and school boards, whose employees would likely never have occasion to
benefit from the fund, opposed the imposition of a payroll tax.
In its pre-study report on
Bill C-22, the Standing Committee on Consumer and Corporate Affairs and
Government Operations rejected the concept of a wage protection fund and
recommended that workers' claims for unpaid wages be given priority over
the claims of all other creditors, in the event of an employer's bankruptcy,
liquidation or placement in receivership.
During clause-by-clause consideration
of the bill in late 1991, the government proposed that the WCP Act be
amended to defer the imposition of the tax for a period of one year and
to allow the Governor in Council to adjust the percentage of the payroll
tax to cover the payment of benefits under the program.
After procedural concerns
in the Standing Committee, the government reconsidered its position on
the WCP Act and, in May 1992, the Minister of Consumer and Corporate Affairs
announced that it would be withdrawn.
Amendments to the existing
preferred creditor provisions were put forward. Thus, the Bankruptcy
and Insolvency Act maintains preferred creditor status for unpaid
wage claims and salesperson's expenses where an employer is bankrupt,
but the amount of the claim was raised from $500 to $2,000 for wages and
from $300 to $1,000 for salesperson's expenses. Where an insolvent employer
makes a proposal to reorganize his or her business, unpaid wages up to
$2,000 and salesperson's expenses up to $1,000 are to be paid immediately
after court approval of the proposal.
When Bill C-22 received Royal
Assent on 23 June 1992, the Minister of Consumer and Corporate Affairs
announced that he intended to refer the matter of wage claims for reconsideration
by a special Joint Committee of the House of Commons and the Senate, which
would report by the summer of 1993. This Committee was never established.
Bill C-5 made no changes with respect to
the overall amount of wage claims. The bill, however, allows a representative
of a federal or provincial ministry of labour or a union to file a proof
of claim on behalf of all employees.
B.
Secured Creditors and Receivers
An amendment to regulate
receivers has been part of bankruptcy reform proposals since 1975. In
the common law provinces, a receiver is a person who, by agreement or
court order, has taken possession of all or substantially all of the debtor's
assets. Under the usual terms of commercial financing agreements, which
include debentures, loans under the Bank Act, floating charges
and conditional sales contracts, on default of payment the secured creditor
may appoint a receiver to take possession of the debtor's assets and sell
them in order to pay off the debt.
There were no provisions
in the Bankruptcy Act to govern the conduct of secured creditors
and receivers, even though the interests which the receiver represented
were in conflict with those of the debtor and the unsecured creditors.
Because the bankruptcy administration is generally subject to the prior
rights of secured creditors, a receiver could be appointed to take possession
of all the assets of the estate before or after the date of bankruptcy,
leaving few if any assets to be administered by a trustee in bankruptcy.
There was no mechanism to permit either the unsecured creditors or the
Superintendent of Bankruptcy to maintain any surveillance over the receiver's
conduct to ensure that the receiver acted fairly, given the residual claims
of all subordinate creditors. To remedy this, the reforms in the Act are
aimed at disclosure, accountability and preventing conflicts of interest
in a receivership situation.
The BIA requires receivers
of insolvent debtors to act in good faith and to deal with the insolvent
person's property in a commercially reasonable manner. This standard of
conduct was first suggested in the 1975 Senate committee report on Bill
C-60 and has been part of all subsequent bills.
Notice of the receiver's
appointment has to be given to the debtor, other creditors and the Superintendent
within ten days. Additional information in the form of a receiver's statement
has to be furnished to the insolvent person or trustee, and on request,
to creditors. Interim reports of the receiver's administration and a copy
of his or her final report and statement of accounts has to be provided
to the Superintendent, the trustee, or insolvent person and to creditors.
A secured creditor wishing
to enforce a security has to give at least ten days' prior notice. This
gives the debtor an opportunity to file a notice of intention to file
a proposal, thus providing a 30-day breathing space to try to negotiate
a reorganization plan with creditors and avoid bankruptcy.
To ensure accountability,
the Act empowers a court to order that a receiver pass his or her accounts.
To avoid conflicts of interest, it prohibits a person who was a director,
officer, employer, employee, auditor, accountant, or solicitor of a debtor
within the two preceding years from acting as a trustee without court
approval. Nor can persons related to those persons be permitted to act
without court approval. A person who is a trustee, receiver or liquidator
for a person related to the debtor cannot act as a trustee in bankruptcy
unless he or she makes full disclosure of that fact and of the potential
conflict of interest. Trustees cannot act as receivers of the property
unless they first obtain an independent opinion on the validity of the
security and then inform creditors of this and of the basis of their remuneration
as receivers. These accountability and conflict of interest proposals
have been a part of every bill since C-60, implementing the Tassé Report's
recommendation in this regard.
C.
Commercial Proposals
The Act allows a business
debtor to make a "proposal" to creditors, thus effectively freezing
the enforcement remedies of secured and unsecured creditors while attempts
are made to reorganize the business.
1. Stays of Proceedings
The BIA gives debtors a certain
amount of time to prepare and negotiate reorganization proposals. A 30-day
statutory stay of proceedings binding on both secured and unsecured creditors
is established. This period can be extended by court order for periods
of up to 45 days each, provided that all extensions do not exceed five
months. Then, upon the filing of the proposal, a further stay is imposed
on all creditors pending a creditors' meeting to be held within 21 days.
Should the debtor fail to file a reorganization plan within the 30-day
or the extended time period as the case may be, the debtor is deemed to
have made an assignment in bankruptcy.
In its pre-study report on
Bill C-22, the Standing Committee on Consumer and Corporate Affairs and
Government Operations supported the concept of allowing a debtor to extend
the stay period beyond six months, subject to creditor approval. This,
however, was rejected by the government.
2. Liability of Directors
and Stays of Action against Directors during Reorganizations
Corporate directors may be
liable for certain debts of a corporation, such as wages, vacation pay,
source deductions from employees salaries and GST remittances. When
a corporation seeks to reorganize under the BIA to stave off bankruptcy,
the directors continue to be liable unless they can negotiate releases
with the relevant creditors. There has been concern that directors
inability to settle such claims in the course of a reorganization may
dampen their commitment to rebuilding the insolvent company.
With the enactment of Bill
C-5, the BIA addresses this concern by proposing that a reorganization
proposal be allowed to include provisions for compromising claims against
directors that arise before the commencement of proceedings under the
BIA and that relate to liabilities for corporate obligations that are
imposed on directors by statute. Claims against directors that relate
to contractual rights of creditors or that are based on allegations of
misrepresentation made by directors to creditors or on wrongful or oppressive
conduct by directors cannot be included in a proposal. Where a notice
of intention or proposal had been filed by a corporation, the BIA will
now stay all proceedings against directors in relation to their statutory
obligations.
3. Protection for Creditors
To protect creditors during
the stay period, the court has authority to appoint an interim receiver
of the debtor's estate. The court can direct the interim receiver to take
possession of the debtor's property and exercise control over such property
and business.
A creditor can also apply
to the court to have a stay lifted where he or she is materially prejudiced
by its continuance.
4. Voting
The 1992 revisions lowered
the required majority from 75% of the value of claims to 66 2/3% in order
to allow more proposals to succeed. The secured creditors covered in a
proposal can vote by class and no one secured creditor class can defeat
a proposal. Secured creditors can be segregated into classes for the purpose
of voting on a proposal. They will be included in the same class if their
interests are sufficiently similar to give them a commonality of interest,
taking into account: (a) the nature of the debts; (b) the nature and priority
of the security; (c) the remedies available to the creditors in the absence
of the proposal and the extent to which they would recover their claims
by exercising those remedies; and (d) the treatment of the claims under
the proposal and the extent to which the proposal would satisfy those
claims. For the purpose of voting, all unsecured creditors constitute
one class unless otherwise designated. A proposal will be deemed to be
accepted if a majority in number and two-thirds in value of all unsecured
creditors voting on the proposal vote for acceptance. Where a class of
secured creditors votes against the proposal, the proposal will go forward
but will not apply to those classes of secured creditors who opposed it.
Automatic bankruptcy will follow only where unsecured creditors reject
the proposal.
5. Approval by the Court
All commercial proposals
must be approved by the court. However, the court will not approve a proposal
unless it includes full payment within six months of all outstanding arrears
of source deductions for federal income tax, Canada Pension Plan and employment
insurance, and similar provincial liabilities. In addition, the debtor
cannot have defaulted in paying any of these amounts that become due after
the proposal is filed. A proposal will also have to provide for the payment
of outstanding wage claims up to the maximum amounts provided in the Act.
6. Limitations to Certain
Rights
The Act also contains protections
designed to enable the debtor to carry out the proposal successfully.
Where proceedings are ongoing or the proposal is in effect, no person
can claim an accelerated payment, terminate an agreement or a lease, or
discontinue public utility services to a debtor merely on the grounds
the debtor is insolvent, has filed a proposal or that a proposal is in
effect, or because rent or utility charges were in arrears prior to the
filing. A creditor, landlord, or public utility can apply to the court
for an order that the prohibition be lifted. A debtor has the right to
repudiate a commercial lease subject to the right of the landlord to apply
to the court for an order refusing termination.
During the stay period and
the first-six months that a proposal is in effect, the Crown cannot enforce
a statutory garnishment right under the Income Tax Act so long
as current remittances are kept up to date. Repayment of any arrears of
source deductions will be provided for in the proposal so that such amounts
will be fully paid at the end of the six months following the stay periods.
D.
Consumer Proposals
Since 1975, proposed bankruptcy
law amendments have included a separate system for consumer proposals.
The BIA generally adopts
the recommendations of the Colter Report. A "consumer debtor"
is defined as a natural person who is bankrupt or insolvent whose debts
are less than $75,000 (excluding a mortgage on his principal residence).
A consumer debtor can present a proposal to all his creditors applicable
to all his debts, providing for their extension or reduction, or both.
Joint consumer proposals are permitted where the financial affairs of
the debtors are intertwined.
A consumer debtor who wishes
to make a proposal has to obtain the assistance of an administrator, defined
in the Act as a trustee or a person designated by the Superintendent of
Bankruptcy to administer consumer proposals. The administrator prepares
the proposal, investigates the consumer debtor's property, and financial
affairs and provides counselling to the debtor in accordance with directives
issued by the Superintendent.
On the filing of a consumer
proposal, actions by all unsecured creditors are stayed until the proposal
is fully performed, withdrawn, refused or annulled, as the case may be.
Secured creditors, however, are able to realize on their securities.
After a proposal has been
filed, either the official receiver, or creditors having at least 25%
in value of the claims against the debtor, can call a meeting of creditors
to vote on the proposal. If neither the official receiver nor the creditors
requires a meeting, the proposal is deemed accepted. If a meeting of creditors
is held, voting to accept or refuse a proposal is by ordinary resolution
with all creditors voting as one class on the basis of one dollar equals
one vote.
The necessity of having court
approval for a proposal once it has been accepted by the creditors is
waived. It is still available, however, should any interested party wish
to make application to the court.
During the proposal period
a consumer debtor is protected against public utility shut-offs, termination
of leases and agreements, and employee dismissals based only on the fact
that the consumer or employee has made a proposal.
E.
Consumer Bankruptcies
1. Summary Administration
Under the BIA, two types
of administration are applicable to the estates of individual bankrupts:
summary administration and ordinary administration. Summary administration
applies where the assets available for distribution to the unsecured creditors
do not exceed $5000 or such other amount prescribed by statutes. Summary
administration procedures are more streamlined and less expensive than
those for ordinary administrations.
2. Automatic Discharge
Nine months after the bankruptcy
takes place, first-time consumer bankrupts are entitled to an automatic
discharge unless the discharge is opposed by the trustee, a creditor,
or the Superintendent or the bankrupt fails to obtain counselling. Automatic
discharge was recommended by the Colter Committee to eliminate the expense
of discharge proceedings. In its pre-study report, the Standing Committee
on Consumer and Corporate Affairs and Government Operations supported
the concept of automatic discharge but recommended that all consumer bankrupts
be required to receive financial counselling before being discharged from
bankruptcy. The Act reflects this recommendation.
Previous bills provided for
an automatic discharge of the consumer debtor after either ninety days
(Bill C-60) or six months (Bills S-9, S-11, C-12, C-17) from the date
of the bankruptcy order.
3. Application
for a Discharge from Bankruptcy
The BIA sets out
the types of orders that a court may make on an application for discharge
from bankruptcy. If certain facts are proven, however, the court may refuse,
suspend or order a conditional discharge. The BIA, as amended by Bill
C-5, gives the court the power to refuse, suspend or order a conditional
discharge where a bankrupt has not complied with an order to pay his or
her surplus income to the trustee for distribution to the creditors or
where a bankrupt who could have made a viable proposal has chosen bankruptcy
rather than a proposal to creditors as a means of resolving his or her
indebtedness.
4. Property Exempt from
a Bankruptcy
Subject to certain
exceptions, all property of a bankrupt person vests in the trustee for
the benefit of the creditors. These exceptions are found in section 67
of the BIA and include property held in trust by the bankrupt for others
and property that is exempt from execution or seizure under provincial
law.
With the enactment of Bill
C-5, the exceptions have been broadened to exclude from a bankruptcy any
property that is exempt from execution and seizure under any laws applicable
in a province (this would include federal laws) and GST credits and income
support payments necessary to meet the essential needs of an individual.
5. Payment of "Surplus
Income"
The BIA establishes
a framework to encourage bankrupt individuals to reimburse their creditors.
Trustees will have the authority to establish an amount of money that
a bankrupt person will be required to pay to recompense creditors after
taking into account the bankrupts total income and the income required
to allow the bankrupt to maintain a reasonable standard of living.
6. Family Support Claims
Prior to the enactment
of Bill C-5, spouses were not considered creditors for the purposes of
proving claims for spousal and child support in bankruptcy proceedings.
Bill C-5 amends the BIA by providing that claims for alimony payments
or for spousal or child support required under a court order or an agreement
made prior to bankruptcy and when the spouse or child was living apart
from the bankrupt are claims provable in bankruptcy proceedings. In addition,
claims for alimony, spousal and child support payments that accrue during
the year before a bankruptcy as well as any lump sum payable rank as preferred
claims for the purposes of payment under the Act.
7.
Non-dischargeable Debts
An order discharging a person
from bankruptcy does not affect certain kinds of debts. Such debts remain
outstanding even though all other debts are wiped out by a discharge.
Among the debts that currently fall into this category are fines imposed
by a court, alimony, maintenance and support payments, and debts and liabilities
arising out of fraud.
To the list of non-dischargeable
debts Bill C-5 added an award of damages by a court in civil proceedings
in relation to intentionally inflicted bodily harm or sexual assault or
wrongful death resulting from those actions.
Under changes to the Act
that came into force on 18 June 1998, student loan debts are non-dischargeable
if the bankruptcy occurs before a person ceases being a full or part-time
student or within ten years after studies end; before the amendments of
June 1998, the Act referred to a period of two years after the end of
studies, rather than ten. The court can, however, order a student loan
debt to be discharged after ten years where the bankrupt acted in good
faith and is not able to repay the loan due to genuine financial difficulty.
F.
Crown Priority
Prior to the passage of Bill
C-22, section 136 the Bankruptcy Act gave a preferred ranking to
the federal and provincial governments in the distribution of the proceeds
realized from the property of the bankrupt. To add to this statutory priority,
the federal government and most provincial governments had created statutory
deemed trusts or deemed security interests intended to rank in priority
over the claims of secured creditors. The deemed trust device effectively
circumvents section 136(1) because section 67 of the Bankruptcy Act
excludes from a bankruptcy all property held by the bankrupt in trust
for any other person. The federal government has used this legal fiction
in respect of claims for amounts deducted from employees for Canada Pension
Plan premiums, employment insurance and withholding under the Income
Tax Act.
Under the 1992 amendments,
all Crown claims except for Canada Pension Plan, unemployment insurance
(now employment insurance) and income tax withholdings became ordinary
unsecured claims. The Crown, however, can obtain a secured position by
registering its claim.
G.
Unpaid Suppliers
The idea of providing protection
to unpaid vendors is not a new concept in Canadian law. A provision relating
to unpaid suppliers can be found in the Civil Code of Quebec and
was proposed in the 1970 Tassé Report.
The recommendations of the
Tassé Report were acted upon in 1980 when the Honourable Judy Erola, then
Minister of Consumer and Corporate Affairs, stated that unpaid suppliers
of merchandise should be allowed to recover their goods. The Minister
discussed a proposed amendment to Bill C-12 which would have allowed unpaid
suppliers to recover any merchandise delivered within 10 days prior to
a bankruptcy if a claim was made within 30 days of the triggering event.
Bill C-17 in 1984 would also
have given unpaid suppliers the right to repossess their goods. An unpaid
supplier could have demanded the return of the goods if they were delivered
within 10 days of the insolvency and if the demand was made within 30
days of the insolvency. The goods would have had to be identifiable and
not re-sold, or subject to any agreement for sale or a conditional sales
agreement.
The Colter Committee considered
protecting unpaid suppliers, but felt that this would be inequitable and
prejudicial to other unsecured creditors. If unpaid suppliers were to
receive any special protection, the Committee was of the opinion that
it was for the provinces to legislate and not the federal government.
The 1988 Departmental proposals
contained a repossession right. The Department was of the view that unpaid
suppliers required special protection as they were often small businesses,
which generally had only ordinary creditor status in the bankruptcy of
their customers. A right to repossess unpaid-for goods would also remedy
the inequity which results when debtor-businesses, just before bankruptcy,
receive inventory which they use to pay secured creditors at the expense
of the business that supplied the merchandise.
In its pre-study, the Standing
Committee on Consumer and Corporate Affairs and Government Operations
favoured a priority for unpaid suppliers but recommended that the priority
should apply in cases where goods were delivered within the 15 days prior
to the purchaser's bankruptcy or placement in receivership and where the
demand for repossession was made within 15 days after such an event.
The BIA gives unpaid suppliers
the right to repossess merchandise delivered to a purchaser who becomes
bankrupt or goes into receivership. A number of conditions would apply
to this right. First, the supplier has to make a written demand for the
goods within 30 days after delivery. Second, the purchaser has to be bankrupt
or in receivership at the time the demand is made. Third, the goods have
to be in the possession of the receiver, trustee or purchaser, and must
be identifiable and not fully paid for, in the same state as they were
on delivery and not resold at arm's length or made subject to any agreement
for sale. The right to repossess the goods expires if not exercised within
10 days after it has been confirmed by the trustee, receiver or purchaser.
Where the goods have been
partly paid for, a supplier has the right to repossess a portion of them,
proportional to the amount owing, or to repossess all the goods after
repaying the amount of any partial payment previously received.
The supplier's right to repossession
ranks ahead of any other claim in respect of those goods and a supplier
is not precluded from exercising any rights available under provincial
law.
The BIA also provides a special
right for farmers, fishermen and aquaculturists who deliver their farm
and fisheries products to a purchaser who subsequently becomes bankrupt
or is placed in receivership. Where such products are delivered within
15 days prior to the bankruptcy or receivership and the farmer, fisherman
or aquaculturist files a claim for any unpaid amount in respect of those
products within 30 days thereafter, the claim is secured by a charge on
all of the inventory held by the purchaser. This charge takes priority
over all other rights or charges against that inventory except a supplier's
right of repossession.
H.
Securities Firms
Prior to the enactment
of Bill C-5, the BIA did not contain specific provisions dealing with
the bankruptcy of securities firms. Under the general bankruptcy rules,
securities held by a bankrupt firm for its customers do not vest in the
trustee and are traced and returned to their owners. The process of tracing
the securities is complex, lengthy and costly and the results can be inequitable.
Bill C-5 added new provisions
to the BIA to deal with securities firm bankruptcies. The need to trace
and identify the ownership of securities was avoided by pooling securities
and allocating them in proportion to a customers equity with the
firm.
Securities firms can be petitioned
into bankruptcy by a creditor, a securities commission, an industry-regulated
compensation body or a securities exchange, among others. Trustees have
extensive powers to deal with the assets of the firm. They can buy and
sell securities, discharge security interests, complete open contractual
commitments, maintain customers securities accounts and meet margin
calls, distribute cash and securities to customers and liquidate securities
accounts.
On the bankruptcy of a securities
firm, the securities it owns and securities and cash held for customers
vest in the trustee. Securities registered in the name of a customer ("customer
name securities") do not become the property of the trustee, however.
The trustee is required to establish two funds: a "customer pool
fund," which includes securities (other than customer name securities
and eligible financial contracts to which the firm is a party) and cash
obtained through dividends, interest, the settlement of securities and
customer accounts, and a "general fund," which includes all
other vested property.
The BIA now provides for
a scheme for allocating these funds. Generally, securities and cash in
the customer pool fund are allocated to pay costs of administration that
the general fund cannot pay and to pay customers in proportion to their
net equity. Customer name securities are delivered to their owners. The
general fund is to be used to pay preferred creditors, to make up any
shortfall to customers who had claims remaining after the distribution
of property from the customer pool fund, and to pay relevant compensation
bodies and creditors.
I.
International Insolvencies
Canadian insolvency
legislation is directed at domestic business failure, rather than at insolvencies
with cross-border implications. With the globalization of international
markets, there are increasing numbers of international insolvencies.
The BIA, as amended by Bill
C-5, seeks to harmonize Canadian bankruptcy proceedings with those of
other countries and reduce the number of jurisdictional conflicts when
insolvencies involve assets located in more than one country. Canadian
bankruptcy courts will be able to limit the property to which the authority
of a trustee extends and to make orders to coordinate proceedings under
the BIA with foreign proceedings. These provisions codify much of the
jurisprudence with respect to cross-border insolvencies.
Foreign stays of proceedings
will not apply to Canadian creditors with respect to Canadian property
unless the stay arises from proceedings taken in Canada. Foreign representatives
(persons who carry out duties similar to those performed in Canada by
a trustee, liquidator, administrator or receiver), however, will be able
to commence or continue certain proceedings under the BIA. They can apply
for a receiving order, stays of proceedings against creditors, or the
appointment of an interim receiver and can commence proposal proceedings.
J.
Companies Creditors Arrangement Act
Canadian companies
have two statutes under which they can reorganize in the event of financial
difficulty: the BIA and the Companies' Creditors Arrangement Act.
Unlike the BIA, the CCAA is a relatively short statute that contains few
guidelines and confers considerable discretion on the courts with respect
to commercial reorganizations. It is often used in large, complex arrangements.
Bill C-5 amends the CCAA
to align procedures under that statute more closely with those under the
BIA. Only corporations with liabilities in excess of $5 million are eligible
to reorganize under the CCAA.
Among the changes to the
CCAA contained in Bill C-5 are: the inclusion of claims against corporate
directors as part of a reorganization; providing for the appointment of
a "monitor" to oversee the business and financial affairs of
a corporation; making Crown claims subject to the same stays of proceedings,
priorities and rights to distribution as under the BIA; providing for
a two-thirds voting proportion by creditors with respect to a reorganization
proposal, as is the case under the BIA; including provisions relating
to international insolvencies; precluding the courts from staying the
termination of eligible financial contracts; and providing for a short
first stay of proceedings against creditors with a requirement that another
court order be sought for a further stay.
Aligning the CCAA more closely
with the BIA removes many of the differences between the statutes. However,
the continuing existence of two reorganization statutes has not been fully
addressed. Some commentators have recommended that the CCAA be repealed.
The fate of the CCAA is likely to be examined during the next review of
the CCAA and the BIA which should begin in 2002.
Aligning the CCAA
more closely with the BIA removes many of the differences between the
statutes. However, the continuing existence of two reorganization statutes
has not been fully addressed. Some commentators have recommended that
the CCAA be repealed. The fate of the CCAA is likely to be examined during
the next review of the CCAA and the BIA which should begin in 2002.
CHRONOLOGY
1869 - The first bankruptcy
legislation was enacted by the Parliament of Canada.
1919 - The Bankruptcy
Act was enacted by Parliament in the session of 1919 (9-10 Geo. V,
c. 36), and came into force on 1 July 1920. The Act and amendments thereto
were consolidated and revised and approved as R.S.C. 1927, c. 11.
1949 - A new Bankruptcy
Act was enacted.
1966 - The Act was amended
by An Act to Amend the Bankruptcy Act, S.C. 1966-67, c. 32 to increase
the Superintendent's investigatory powers, to make stricter the rules
relating to fraudulent preferences and to add a new Part X concerning
consumer arrangements by way of extension.
1966 - The Study Committee
on Bankruptcy and Insolvency Legislation (the Tassé Committee) was appointed
to undertake an in-depth study of Canadian bankruptcy law.
1970 - The Tassé Report was
published, recommending the enactment of a completely new bankruptcy and
insolvency statute that would establish an integrated and comprehensive
bankruptcy system.
5 May 1975 - Bill C-60 was
tabled by the Hon. Herbert Gray, then Minister of Consumer and Corporate
Affairs. After first reading in the House of Commons, the bill was referred
to the Senate Committee on Banking, Trade and Commerce. The Committee
recommended 139 changes to the bill.
21 March 1978 - Bill S-11
was introduced in the Senate. It contained 128 of the amendments recommended
by the Senate Committee reviewing Bill C-60. Second reading followed on
4 April 1978 but the bill was not passed.
27 February 1979 - Bill S-11
was re-introduced in the Senate as Bill S-14. It progressed to second
reading on 13 March 1979 and died on the Order Paper with the dissolution
of the 30th Parliament on 26 March 1979.
8 November 1979 - Bill S-14
was re-introduced in the Senate as Bill S-9 during the 31st Parliament.
It died on the Order Paper on 13 December 1979 after first reading.
16 April 1980 - Bill C-12
was introduced in the House by then Minister of Consumer and Corporate
Affairs, André Ouellet. The bill received second reading on 26 September
1983 and was referred to the Commons Committee on Finance, Trade and Economic
Affairs. Parliament was prorogued before the Committee completed its hearings.
1981 - A committee chaired
by Raymond Landry of the University of Ottawa was asked to make recommendations
on wage protection. The report of the Committee on Wage Protection in
Matters of Bankruptcy and Insolvency was published in October 1981.
31 January 1984 - Bill C-17
was introduced in the House by then Minister of Consumer and Corporate
Affairs, Judy Erola. It was essentially the same as the previous bill
except for some technical amendments. Further amendments were tabled on
28 May. The bill died on the Order Paper after second reading.
March 1985 - An Advisory
Committee composed of trustees and lawyers was appointed by the then Minister
of Consumer and Corporate Affairs, Michel Côté, to examine the bankruptcy
system, assess possible reforms and recommend amendments. The report of
the Committee (the Colter Report) was tabled in January 1986.
September 1986 - A discussion
paper on Bankruptcy Act Amendments was published by the Legislative Review
Branch of the Department of Consumer and Corporate Affairs, indicating
its recommendations based on the findings of the Colter Report and its
own consultations with interest groups and with the provinces.
1988 - A document entitled
"Proposed Revisions to the Bankruptcy Act" was published
by the Department. It proposed an initial package of selected reforms
in eight areas of the law.
March 1989 - The Report of
the Advisory Council on Adjustment (the de Grandpré Report) recommended
that the Department expedite amendments to the Bankruptcy Act to
create a national wage earner protection fund. The Advisory Council was
created in January 1988 to examine adjustment issues arising from the
Free Trade Agreement.
March 1990 - A working document
prepared for the Economic Council of Canada by B.-M. Papillon did not
support the idea of a wage earner protection fund but instead proposed
changes to the unemployment insurance program. It also advocated a "first
in, first out" rule for all creditors (secured and unsecured), except
for supplier and Crown claims.
13 June 1991 - Bill C-22,
containing amendments to eight key areas of bankruptcy law, was introduced
in the House by the Minister of Consumer and Corporate Affairs, Pierre
Blais.
7 October 1991 - The House
of Commons Standing Committee on Consumer and Corporate Affairs and Government
Operations tabled its report on the pre-study of Bill C-22.
23 June 1992 - Bill C-22
received Royal Assent. It will come into force on proclamation.
30 November 1992 - Provisions
of the Bankruptcy and Insolvency Act came into force.
24 November 1995 - Bill C-109,
containing amendments to the Bankruptcy and Insolvency Act, the
Companies Creditors Arrangement Act and the Income Tax
Act, was introduced in the House of Commons. It died on the Order
Paper after first reading.
4 March 1996 - Bill C-5,
which is essentially the same as Bill C-109, was introduced in the House
of Commons.
February 1997 - The Standing
Senate Committee on Banking, Trade and Commerce issued a report on Bill
C-5 in which it recommended a number of amendments to the bill.
13 February 1997 - Bill C-5,
as amended, received third reading by the Senate.
15 April 1997 - The House
of Commons concurred in the Senate amendments to Bill C-15.
25 April 1997 - Bill C-5
received Royal Assent.
30 September 1997
- All sections of Bill C-5 came into force except for paragraph 67(1)(b.1),
section 68, subsection 102(3), paragraph 168.1(1)(e), section 170.1, paragraph
173(1)(m), and paragraph (n).
30 April 1998 - The final
portions of Bill C-5, including major amendments requiring new regulations
and the introduction of mediation services, came into force.
18 June 1998 - Bill C-36,
An Act to implement certain provisions of the budget, tabled in Parliament
on 24 February 1998, received Royal Assent. The Act provides that
a student loan debt will not be discharged where bankruptcy occurs within
10 years after the end of studies. Prior to this change, the period
was two years.
SELECTED REFERENCES
Advisory Committee on Bankruptcy
and Insolvency. Proposed Bankruptcy Act Amendments. (2nd ed.).
Minister of Supply and Services, Canada, 1986.
Committee on Wage Protection
in Matters of Bankruptcy and Insolvency. Wage Protection in Matters
of Bankruptcy and Insolvency. Minister of Supply and Services, Canada,
1981.
Department of Consumer and
Corporate Affairs. Background Papers for the Bankruptcy and Insolvency
Bill. Canada, 1975.
Department of Consumer and
Corporate Affairs. Background Papers for the Bankruptcy and Insolvency
Bill (1978). Canada, 1978.
Department of Consumer and
Corporate Affairs. Proposed Revisions to the Bankruptcy Act. Canada,
1988.
Houlden, L.W. and
C.H. Morawetz. Bankruptcy and Insolvency Law of Canada. Third Edition,
Carswell, 1998.
Industry Canada, Office of
the Superintendent of Bankruptcy. Insolvency Bulletin (various
issues).
Klotz, Robert A. "Protection
of Unpaid Suppliers and the New Bankruptcy and Insolvency Act." The
Canadian Business Law Journal, Vol. 21, No. 2, January 1993, p. 161-189.
Morantz, Gordon R. "Reconciling
C-22 and the CCAA." Bankruptcy and Finance Law Review, Vol.
9, No. 1, November 1993, p. 25-43.
Ziegel, Jacob S., "Canadian
Bankruptcy Reform, Bill C-109, and Troubling Asymmetries," Canadian
Business Law Journal, Vol. 27, 1996, p . 108-131.
* The original version of this Current Issue Review was published
in November 1988; the paper has been regularly updated since that time.
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