Х Debtor in possession (DIP) financing. There is agreement that in Pareto efficient cases where secured debt would not be materially compromised new debt should be allowed to take precedent over old. The BIA does not contemplate this while CCAA seems to allow judges to do anything at all that they find to be in their Уinherent ju risdiction.Ф There is some envy about the rules on debtor in possession financing in Chapter 11 of the US Bankruptcy Code.
Х Unpaid suppliers: as it stands, only suppliers of goods, not services, are given limited protection. Repossessing a service once per formed, or information once provided, is difficult to say the least.
Canada, Industry Canada, Corporate and Insolvency Law Policy Directorate, Report on the operation and administration of the Bankruptcy and Insolvency Act and the Compa niesТ Creditors Arrangement Act, Ottawa, September 2002; available July 2003 on http://strategis.ic.gc.ca/epic/internet/incilp pdci.nsf/vwapj/Bankruptcies.pdf/$FILE/3040 Bankruptcies.pdf.
Х UNCITRAL: should the model law on cross border insolvencies of the UN Working Group on Insolvency Law replace Part III of the BIA Reciprocity may be part of the answer.
The second group of issues is thought to be bridgeable by compro mise and careful drafting and include the following:
Х Survival of contracts: real property leases as well as software li censes pose some novel problems.
Х Integration of the BIA and CCAA: This appears to be a matter of edi torial neatness more than substance, as there is broad agreement that both the BIA and CCAA styles of reorganization ought to con tinue to exist Ц perhaps with better provision of information under the CCAA regime.
Х DirectorsТ liability: Is the balance between attracting capable direc tors (and retaining them when, in a crisis, they are most needed) and creating sufficient onus to focus their attention correct Х Likewise, sanctions for director and officer conduct detrimental to creditors: are they optimal, given the same need for balance Х Transfers at undervalue and unfair or fraudulent preferences: these provisions have not been updated since 1949.
Finally, there were a number of uncontroversial, largely technical items that will almost certainly be added to the eventual Bill:
Х Securities firm bankruptcies: there needs to be a better definition of customer name securities to give certainty to Registered Retire ment Savings (and Education) Plan holdings, and trustees should be allowed to sell securities and distribute proceeds in cash rather than as securities.
Х WUA: There is consensus that the Winding up Act should be used only in the insolvency of a financial institution.
Х Should stays of legal proceedings during reorganization apply to provincial regulators such as securities commissions and stock ex changes No.
Х Trustee liability for successor employer obligations and pension claims: there is broad agreement that the moves to circumscribe trustee liabilities in 1992 and 1997 should cover these remaining open ended liabilities.
Х Supervision of reorganizations under the CCAA: It is likely that the Superintendent will be called on to supplement the work of the Court by keeping records in a national and public registry, require monitors to be qualified trustees, handle complaints, and intervene at Court when necessary. In this way the presently scattered and in consistent public records of CCAA actions can be brought up to BIA standards, leading among other things to better possibilities for re search and analysis.
Х Funding and operations of the Office of the Superintendent of Bankruptcy: New money and permission to use new technology is needed.
These issues are discussed in the Industry Canada report cited above.
Another matter which may arise concerns the rules for the calculation of contingent liabilities and the degree to which they are to be taken into account in determining solvency. It is sometimes possible for new public policy, legal decisions, or other СaccidentsТ to lead a firmТs management to choose a strategic bankruptcy or other disruption of normal commer cial proceedings. This has been a problem in the US in the case of prod uct liability suits, where courts have awarded astonishingly large dam ages, and may be the reason why the Ontario government has been un able to privatize Ontario Power Generation. In this case, despite (or per haps because of) new federal legislation, the environmental liabilities for nuclear waste management are not calculable.
The Senate committee report. The Senate Standing Committee on Banking, Trade and Commerce took all these matters under advise ment and held extensive hearings, reporting in November 2003234. The Report will doubtless carry much weight when the new House of Com mons is convened in the fall of 2004.
The Committee made a number of recommendations. The most im portant, including those likely to be of most interest to Russian reform ers, were as follows:
Х Debtor in possession financing, which has appeared in Canadian practice on an ad hoc basis in CCAA proceedings, should be recog Canada, Standing Senate Committee on Banking, Trade and Commerce, Debtors and creditors sharing the burden: a review of the Bankruptcy and Insolvency Act and the CompaniesТ Creditors Arrangement Act, Ottawa, November 2003. This thoughtful and wide ranging report contains, i.a., a summary of the history of Canadian insolvency legis lation at Appendix B and a useful review of legislation in other English speaking countries at Appendix D.
nized under both statutes, subject to approval by the Court. The lien of the DIP lender would be able to rank ahead of any existing security in terests that the Court may specify, after hearing evidence on seven considerations proposed by the Joint Task Force on Business Insol vency Law Reform235, namely:
- Уwhat arrangements have been made for the governance of the debtor during the proceedings;
- whether management is trustworthy and competent, and has the confidence of significant creditors;
- how long it will take to determine whether there is a going con cern solution, either through a reorganization or a sale, that creates more value than liquidation;
- whether the DIP loan will enhance the prospects for a going concern solution or rehabilitation;
- the nature and value of the assets of the debtor;
- whether any creditors will be materially prejudiced during that period as a result of the continued operations of the debtor; and - whether the debtor has provided a detailed cash flow for at least the next 120 days.Ф Х Noting that the provisions against fraudulent preferences and transfers at undervalue had not been updated since 1949 and were thus subject to a wide variety of provincial procedures under ordi nary debtor creditor law, the Committee called for both Acts to be amended to ensure consistent and simplified rules for challenging such transactions. The Committee did not, however, specify the content of a possible new code, a matter that will require some thought. Considerable work will be necessary before amendments in 2005 can be drafted to deal with the subject in a durable manner.
Х On a related matter, the sale of substantial assets or even parts of the business during reorganization should be allowed, but only with the prior approval of the Court. The Court would take into consid eration whether the sales process was fair, reasonable, and trans parent to the creditors. No sales to directors, officers or sharehold ers of the debtor would be allowed other than in exceptional cir cumstances.
This entity brought together the views of the three principal professional organizations in the field and is evidence of the growing importance of such organizations in law reform.
Х Under both Acts, the Committee recommended that the Court have discretion to replace some or all of the debtorТs directors if their presence was impeding reorganization, and that the Court have the power to approve the equity structure of the debtor in a reorganiza tion plan, with or without shareholder approval.
Х The potential conflicts of interest in the roles played by monitors (especially) and trustees should be addressed and eliminated, and all insolvency practitioners should be governed by a possibly ex panded ethics code.
The foregoing recommendations have the effect of strengthening the already robust provisions against predatory and fraudulent take overs and asset stripping by requiring greater transparency and by put ting substantial new powers of approval and even independent action in the hands of judges. Other important recommendations include:
Х The UNCITRAL model code for international insolvencies should be adopted, possibly with a requirement for reciprocity, and in any case with the addition of a Canadian creditorsТ committee, all sub ject to the supervision of the Court.
Х The treatment of qualifying debt as Уdistress preferred shares,Ф a measure which provides lower cost restructuring since dividend in come is treated more favourably than interest in Canadian tax law, would be made easier. Tax obligations from the period prior to the point of bankruptcy would also be treated as pre filing claims, allowing the reorganized company a fresh start from a tax point of view. The Department of Finance will probably object on revenue grounds to this tilting of the rules of the game toward reorganization and away from liquidation.
Х The plea that equity claims should mimic US practice was rejected on the reasonable grounds that investors knowingly took the risks of equity, including the risk that issuers lied or withheld material facts, when they made their decisions.
Х Of this class of other important recommendations, the most signifi cant have to do with the disclaimer or assignment of executory con tracts. Executory contracts are those that impose a performance obligation that continues past the date of contract signing. The Senate Committee recommendation would move Canadian practice toward that of the US by allowing both the disclaimer of executory contracts in force at the time of filing, and the assignment of such contracts by those in charge of liquidation or reorganization. In the first case, contracts such as collective labour agreements may im pede or even make impossible a restructuring. Labour unions ar gued strenuously that they always bend when the choices become stark Ц i.e., they always behave reasonably when faced with dismal alternatives Ц and should not be forced to accept unilateral abroga tion of freely bargained contracts. Executory contracts involving in tellectual property issues like software licenses and copyrights also raise a number of questions where current practice does not yet of fer robust guidance, either with respect to disclaimer or assign ment. These are controversial matters and will not pass into legisla tion without a fight in the House of Commons.
The Senate Committee also made a number of recommendations for minor changes, most of which will not be controversial. The more controversial are those at the top of the following list:
Х Repeal the protection for unpaid suppliers (unless they be among those politically potent lobby groups, fishermen or farmers);
Х Reinstate the priority for claims by provincial workmenТs compensa tion boards that was removed in 1997;
Х Extend the exemption from stays to most provincial regulators, in cluding securities regulators, and quasi judicial tribunals;
Х Create a general due diligence defence against personal liability for company directors;
Х Likewise make it clear that trustees are not Уsuccessor employersФ by clarifying the distinction between the personal liability of an in solvency practitioner from that of the debtorТs estate;
Х Expand specialized judicial education;
Х Update the tariff of fees that may be charged by insolvency practi tioners;
Х Add rules regarding the insolvency of business trusts: this is a rela tively novel form of business organization in Canada under which the entity is not taxed but passes on its profits and losses directly to the unit holder;
Х Refrain from consolidating the BIA and CCAA, but on the other hand ensure that CCAA takes on the scheme of priorities now in the BIA, and arrange for a five year review not just of these two acts but also the Winding Up Act and the Farm Debt Mediation Act;
Х Clarify the BIA definition of Уnet equityФ and the status of cash in the accounts of bankrupt brokerages; and Х Allow the Superintendent of Bankruptcy to use certain dormant fund balances for research and practitioner education.
As may be seen, there is an imperfect overlap between the list of is sues and options by Industry Canada and the recommendations of the Senate Standing Committee. All these materials, and the updated briefs by concerned parties, will come before a committee of the House of Commons when it meets again in the fall of 2004. The prospect for the passage of controversial measures in a minority government is not great, however, and it is for question at this point whether Parliament will get around to further reform of the insolvency statutes before an other election.
Two general points arise from this discussion of bankruptcy reform in Canada. One is the importance of the rise of a cadre of professionals Ц judges, lawyers, trustees, receivers, monitors, and the institutions and firms that house them Ц in terms of both pushing for reforms and side lining the special pleadings of interest groups. Skeel makes the point that the US did not develop stable law in the area until the rise of an УeliteФ bar during the period of railroad reorganization following the Civil War236. In both countries the rise of professions objectively mediating between creditors and debtors in insolvencies has made the laws, and the system of practice, much more serviceable and less subject to abuse.
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