“A basic difference between a proposal under the BIA and a Chapter 11 reorganization under the US Bankruptcy Code is that in Canada, there must be a trustee who, as an officer of the Court, is responsible for administering the proposal. There is no provision under the BIA for a debtor in possession administering its own proposal as there is in the United States”224.
CCAA Plan of Arrangement. CCAA is more flexible. The grant, scope and timing of any stay are in the discretion of the judge, though case law is firming up. While the scope of the stay may be broader than under the BIA, the judge must be satisfied that the stay is in the best interests of both debtor and creditors. Under CCAA all classes of creditors must approve the plan of arrangement. Since 1997, the same two thirds of value and half in number of creditors as in the BIA must approve. Since the greater the number of classes, the greater the probability of a re fusal by one class, and since Canadian law does not include the US concept of “cram down” under Chapter 11, the definition of classes be comes a matter of some art. The definitions are proposed by the debtor, may be opposed by creditors, and must be approved by the judge.
L.J. Crozier, personal communication.
Under CCAA, the judge remains an active player throughout the en tire proceeding. He is entitled to all information about the plan of ar rangement and actions taken by any party under it. He must, under the statute, appoint a monitor (who may or not be the debtor’s auditor) as an officer of the Court to oversee financial reporting and the debtor’s actions generally. He may make such procedural or orders as he judges likely to lead to the attainment of the reorganization objective of the Act, and he may do so on his own account or on the motion of any of the parties.
“The CCAA has gained popularity as an instrument for the reorgani zation of insolvent debtors because it is a less technical and more flexi ble statute than the BIA. In addition, unlike the BIA, it has the advantage that the failure of a plan to obtain creditor approval does not result in automatic bankruptcy. However, as all proceedings under the CCAA are directed by the Court they are generally more costly than a reorganiza tion under the BIA. Thus, the CCAA tends to be used only in very large retailing and manufacturing reorganizations. Most reorganizations in Canada occur under Part III of the BIA”225.
7.3. Legislative reform of the Canadian Acts The BIA and CCAA are important pieces of marketplace framework legislation whose provisions affect thousands of companies directly and many more indirectly. They have important effects on the cost and availability of capital throughout the whole economy. Their provisions need periodic updating to take account of changing technology, com mercial practices and social norms. It may be thought surprising, there fore, that the 1919 BIA has been amended only three times – twice in the last decade – and CCAA only once, and then largely as a conse quence of the 1997 BIA amendments.
Politics of reform In fact there are several reasons for these long delays. At heart is the problem that there is never much of a consensus among the various stakeholders about what amendments should be made. Creditors and debtors are competitive players in a less than zero sum game and L.J. Crozier, personal communication.
fiercely defend or seek to extend their existing priorities. Arguments are often polarized by references to heartless bankers throwing innocent people out of work through a too zealous concern about the rights of secured creditors, or by the wrenching claims of unpaid wage earners, trade creditors, widows and orphans, and even farmers and fishermen.
Weak parties with inadequate information or contractual rights to pro tect their own interests are protected to a degree by statute – often, it may be claimed, at the price of near fatal compromises of the commer cial credit system. It does not help in these heated and political argu ments that the external costs of bankruptcy, including higher interest costs generally, are borne by firms and individuals who may never oth erwise contact the bankruptcy regime. Organized lobbies of interested parties may find it difficult to pass amendments to their liking, but they have less difficulty in blocking those favoured by others.
Under these circumstances there is little reward for politicians to risk their re election on a subject where, it seems, any given proposal is op posed by three quarters or more of the affected parties. Indeed, this was the legislative fate of comprehensive BIA amendment bills on sev eral occasions between 1975 and 1984, following the TassйReport of 1970226. Three events came together to allow the first amendments in years to be passed in 1993. First, the US greatly modernized its proce dures in its Bankruptcy Code of 1978. Here as in other areas the Cana dian government realized that there is a market for good framework legislation, and that if Canada did not keep up with developments abroad it could become less attractive as a place for investment. Sec ond, the professionals in the bankruptcy business – the lawyers, ac countants and trustees – started through their professional organiza tions to put forward well argued and expert views that were not espe cially tainted by pecuniary interest. The Insolvency Institute of Canada, the Canadian Insolvency Practitioners Association, and the Canadian Association of Insolvency and Restructuring Professionals in particular have all been helpful in keeping the matter in the public eye and in put ting forward well reasoned proposals227. Third, the Department (at first Canada, Department of Justice, Report of the study committee on bankruptcy and insolvency legislation (TassйReport), Ottawa, 1970.
Cf. A.F. Kent et al, “Report of the Joint Task Force on business insolvency law reform,” Insolvency Institute of Canada and Canadian Association of Restructuring Professionals, Consumer and Corporate Affairs and, after 1993, Industry Canada) learned that excellent analysis and legislative drafting done in secret had a wonderfully unifying effect on all interested parties when the sur prise result appeared for first reading in the House of Commons. Unfor tunately it tended to unify all parties against the Government proposal.
A breakthrough came in 1986 when, on the basis of the Colter Re port228, the government undertook wide consultations with a view to finding compromise and consensus on as many terms as possible. This process, called by the officials who led it as “putting the inmates in charge of the asylum”229, produced a reasonable consensus on a num ber of issues but fell short of the stem to gudgeon rewrite that many had hoped for. This is inherent in policy processes based on compro mise and consensus but has the advantages of avoiding egregious er ror and smoothing legislative passage.
The 1992 amendments were thus explicitly seen as the first phase of a modernization process that would extend over many years – in fact, indefinitely. Taking as example the Bank Act, which contains a clause requiring Parliamentary attention every ten years, officials inserted a re opener clause in the 1992 amendments, a clause that survived in and which will assure Parliamentary attention to the Act again in 2005.
For the 1997 amendment package – phase two – an external Bank ruptcy and Insolvency Advisory Committee of more than 100 individuals representing about 50 organized interests was created under the chairmanship of the deputy minister. All interested parties – lenders, lawyers, trustees, consumers, students, labour unions, academics – were invited to spend many hours of mostly voluntary time over a period of some two years to hammer out the specifics of amendments that could be recommended by all. Sub committees did research and reached workable compromises in a large number of specialized areas.
Since the field of possible amendments was wide there was opportunity for a particular interest group to yield something in one area for a com March 2002. Some would even argue that there may be too much professional influence on legal draftsmanship: B.G. Carruthers and T.C Halliday, “Professionals in systemic re form of bankruptcy laws: the 1978 U.S. Bankruptcy Code and the English Insolvency Act 1986,” Am. Bankr. Law J. 74:1(2000): 35–75.
Canada, Consumer and Corporate Affairs, Proposed Bankruptcy Act amendments, nd Report of the Advisory Committee on Bankruptcy and Insolvency, 2 ed., Ottawa, 1986.
M.R. Daniels, personal communication.
pensating gain in another. The deputy minister promised that he would recommend all points of consensus to the Cabinet, with the high prob ability that these would pass into legislation since, as by definition non controversial items, they would consume relatively little parliamentary resources. Conversely, there were likely to be a small number of vital topics on which no consensus was possible. In that case, the promise was that the department’s preference (not necessarily the Commit tee’s) would form the basis of recommendations, and the Committee members would not get a chance to wordsmith the language. This was a powerful spur to cooperation and expanded consensus and in the end greatly eased passage through the House and Senate.
Amendments of 1992 and The main focus of the 1992 amendments was to shift the emphasis from straightforward asset liquidation to reorganization. A new com mercial reorganization scheme, Part III, was added to the BIA. Secon dary amendments streamlined the administration of bankruptcy and gave some protection to unpaid suppliers. Within five years of passage, some 3,000 reorganizations involving 17,000 jobs were performed un der the new legislation, and about half the reorganized firms were still active and independent230.
Many of the 1997 reforms focused on ways to give effect to chang ing social norms in personal bankruptcy. On the corporate side, there were a number of reforms231:
• Landlords’ claims arising out of disclaimed leases could be for ac tual damages or for an amount determined by a formula (100 per cent of the rent due in the first year after disclaimer, plus 15 percent of rent due over the remaining term, to an overall maximum not ex ceeding three years’ rent), at the choice of the debtor.
• A super priority was established for the governmental costs of envi ronmental clean up. Provinces in particular had been concerned about “orphan sites.” By contrast, under the US Chapter 11 procedure, the success rate is about 8 percent.
Summarized from the Senate briefing book prepared for the use of departmental offi cials in 1996; thanks to Jim Buchanan and Jacques Hains for the use of this historical document.
• Trustees, however, were no longer personally liable for environ mental damage unless caused by their gross negligence or willful misconduct. If issued a remedial order the insolvency practitioner can comply, contest the order, seek a stay to assess the economic consequences of compliance, or abandon the affected property.
• Disincentives to directors were removed in order to encourage them to stay on and make decisions necessary to salvage the insol vent business. Claims against directors could be compromised as part of a reorganization proposal, directors were provided with a due diligence defence against having paid a dividend while the cor poration was insolvent, and a stay of proceedings on recourse against directors during reorganization proceedings was intro duced.
• Domestic rules were clarified so as to increase cooperation and coordination in international insolvencies: courts could recognize foreign representatives, and could make facilitating or coordinating orders, including stays in Canada. BIA rules continue to protect Ca nadian creditors and assets, however.
• CCAA was amended to import some BIA rules232 for consistency and predictability while maintaining the flexibility to handle complex re organizations. A threshold of $5 million in liabilities was introduced.
Financial disclosure by the debtor was greatly improved. A new offi cer of the Court, a monitor (who might be the debtor’s auditor) could be appointed to examine the debtor’s affairs and file reports with the court. An initial stay of up to 30 days, without automatic ex tension, was introduced, but certain financial contracts, letters of credit and guarantees were exempted from the stay.
• New provisions were added regarding securities firms. Regulatory bodies can now initiate petitions, and a special new act of bank ruptcy was introduced: a suspension for failure to meet capital ade quacy standards. Trustees may deal with securities accounts with For example, as in the BIA, creditors and suppliers are no longer obliged to extend further credit or supplies; with respect to Crown claims, stays, priorities and distribution rights were made to mirror the BIA; use of only one statute was made mandatory; voting in creditor classes was made consistent at half in number representing two thirds of assets;
various standard BIA forms were imported; and the CCAA provisions relating to interna tional insolvencies, environmental liabilities, and directors’ liabilities were made consis tent with the BIA.
out waiting for permission from an inspector. Street name securities were vested in the trustee, pooled, and allocated to customers in proportion to their net equity claims.
• In addition a variety of technical amendments were introduced to improve administration.
The agenda for further reform The Industry Canada report. Parliament commenced its 2004 review of the BIA, CCAA and related Acts with hearings before a Senate com mittee. In preparation, Industry Canada commissioned and published considerable research that has been boiled down into a summary re port233. Really a briefing book, the report isolates issues that may be ripe for reform and discusses options for their resolution without giving par ticular recommendations. Issues are grouped, however, in terms of the expected degree of consensus or controversy they will arouse.
The most controversial issues are thought to be the following:
• Wage earner protection: the degree to which wage and pension income is protected. No consensus: this is the nexus of the classic less than zero sum game.
• Unpaid pension contributions: whether the existing protection for unpaid contributions and unfunded liabilities of pension plans is adequate. Same comment.
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