Commercial insolvency in Canada explained

Commercial insolvency in Canada has options and procedures that are distinct from those available in consumer insolvency proceedings. It is governed by the following statutes:

The following discussion concentrates on insolvency as it applies to corporations, but the rules apply to individuals and other entities involved in commercial matters as well, with necessary modifications.

Financial difficulties prior to insolvency

Provincial legislation under the property and civil rights power of the Constitution Act, 1867 regulates the resolution of financial difficulties that occur before the onset of insolvency, and the BIA incorporates many of them by reference in the application of its provisions. Notable legislation is in effect for governing:

As well, corporate directors have a statutory duty of loyalty to the corporation and a duty of care to all of its stakeholders. It follows that directors have a duty to ensure that their corporation carries on business only if it can meet its liabilities as they become due and if there is a reasonable expectation of newly incurred obligations being satisfied.[8]

Alternatives to resolving financial difficulties

Where a commercial debtor is experiencing financial difficulties, it is generally in his best interests to work with the secured lenders.[9] The following options may be considered in order to seek a resolution to the matter:

All options other than the first four have the effect of staying any proceedings that can be brought against the debtor.

Insolvent persons have the choice of making an assignment immediately, or to seek protection from creditors in order to reorganize their affairs and continue as a going concern. For the latter option, companies owing less than $5 million generally opt to file a Division I proposal, while those owing more can also opt for the CCAA proceeding.

Entities subject to insolvency regime

With certain exceptions, the BIA covers a wide range of entities:

The CCAA covers insolvent companies (together with their affiliates) with debts greater than $5 million.[30]

The Winding-Up and Restructuring Act, in addition to its application to financial institutions, also offers a little-used alternative to the BIA for certain groups of insolvent companies.[31] [32]

Settlement of the insolvent person's estate

The trustee/receiver/monitor must first realize the amount of the proceeds from the property that is available for payment to the different classes of creditors, and different rules apply according to the type of proceeding. They are summarized as follows:

+ Starting with the property under the possession or control of the insolvent personTypeNotice of intention, or proposal[33] [34] Bankruptcy[35] ReceivershipCCAA
Held in trust for another personExcludeExcludeExclude
Exempt from execution or seizureExcludeExcludeExclude
Income tax refunds for the fiscal year of the eventAddAddAdd
Such powers over property as are exercised for the insolvent person's own benefitAddAddAdd
Garnishments for enforcing notices of assessment for income tax, CPP and EI liabilityExcludeExcludeExclude
Withholding taxes deducted at sourceExcludeExcludeExclude
Funds constituting a deemed trust for the Crown (other than for garnishments and withholding taxes deducted at source)Exclude
Third party's property in possession of bankrupt[36] Exclude
Goods shipped in 30 days prior to the event, and still unpaid[37] ExcludeExcludeExclude
Produce of farmer, fisherman or aquaculturist shipped in 15 days prior to the event, and still unpaid[38] ExcludeExcludeExclude
Copyrights and manuscripts for works not yet published[39] Revert to owner
Property transferred at undervalue[40] AddAddAddAdd[41]

The estate is then settled, using the priority of claims outlined in the BIA.

Creation of security interests

It is in the lender's or supplier's best interest to minimize his financial exposure should his client experience financial difficulties. To that end, there is a range of remedies available to establish his status as a secured (vs unsecured) creditor under both provincial and federal legislation.[42] [43]

In the common law provinces, security interests are created through the registration of mortgages and charges against the real property concerned. In Quebec, this is done by way of hypothecs against immoveable property.

For personal property (moveable property in Quebec), secured creditors create their security interests through registration under the Personal Property Security Act ("PPSA") in force in their province, or under the Civil Code in Quebec by way of hypothec through the Registre des droits personnels et réels mobiliers.[44] [45] Banks can also create security interests under SS. 426-427 of the Bank Act,[46] [47] which normally have priority over PPSA registrations.[48] However, as noted by the Supreme Court of Canada in Bank of Montreal v. Innovation Credit Union, with regard to unperfected security interests, this depends on the provisions of the PPSA in effect in the province concerned.

There can be complex interplay between insolvency law and other legal regimes, such as admiralty law.[49]

In the common law provinces and territories, legislation in place for specific security interests is as follows:

ProvincePersonal Property Security ActSecurities Transfer ActBuilders' liensRepair and storage liensWorkers' liens
RSBC 1996, c. 359SBC 2007, c. 10Builders Lien ActRepairers Lien Act, Warehouse Lien ActLivestock Lien Act, Tugboat Worker Lien Act, Woodworker Lien Act
RSA 2000, c. P‑7SA 2006, c. S-4.5Builders' Lien Act Possessory Liens Act, Warehousemen's Lien Act, Garage Keepers' Lien ActWoodmen's Lien Act
SS 1993, c. P-6.2SS 2007, c. S-42.3Builders' Lien ActCommercial Liens ActThreshers' Lien Act, Woodmen's Lien Act
CCSM c. P35SM 2008, c. 14, also referred to as CCSM c. S60Builders' Liens ActGarage Keepers Act, Warehousemen's Liens ActThreshers' Liens Act, Woodmen's Liens Act
RSO 1990, c. P.10SO 2006, c. 8Construction Lien ActRepair and Storage Lien ActForestry Workers Lien for Wages Act
SNB 1993, c. P-7.1SNB 2008, c. S-5.8Liens on Goods and Chattels Act, Mechanics' Lien Act, Storer's Lien ActWoods Workers' Lien Act
SNS 1995-96, c. 13 SNS 2010, c. 8Builders' Lien ActWoodmen's Lien Act
SPEI 1997, c.33, also referred to as c. P-3.1Garage Keepers' Lien Act, Mechanics' Lien Act, Warehousemen's Lien Act
SNL 1998, c. P-7.1SNL 2007, c. S-13.01Mechanics' Lien Act, Warehouser's Lien Act
RSY 2002, c. 169SY 2010, c. 16Builders Lien ActGarage Keepers Lien Act, Warehouse Keepers Lien ActMiners Lien Act
SNWT 1998, c.8SNWT 2009, c.14 Garage Keepers Lien Act, Mechanics Lien Act, Warehouse Keepers Lien Act Miners Lien Act
As NWTSNu 2010, c. 15As for NWTAs for NWT

Debtor protection provisions

Stay of proceedings

No person may terminate or amend — or claim an accelerated payment or forfeiture of the term under — any agreement, including a security agreement, with a bankrupt individual by reason only of the individual's bankruptcy or insolvency.[50] Similar provision is made with respect to any insolvent person upon filing a notice of intention or a proposal,[51] as well as for any debtor company subject to the CCAA by reason only that proceedings commenced under the CCA or that the company is insolvent.[52] Because of these restrictions on what are called "ipso facto" clauses, creditors must be careful in specifying appropriate trigger events in their contracts' termination clauses.[53] The Canadian courts have extended this further through application of the common law principle of fraud upon the bankruptcy law, declaring that termination clauses that are triggered where non-payment of obligations is indirectly caused by the debtor's insolvency should be deemed to have been caused by the insolvency.[54]

A notice of intention [55] or a Division I proposal [56] will automatically create a stay of proceedings and "no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy". Similar provision is also made on the bankruptcy of any debtor.[57] Directors of insolvent companies that have filed a notice of intention or a proposal have similar protection.[58]

Suspension of attachments

S. 70(1) of the BIA provides that bankruptcy orders and assignments take precedence over "all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt,"[59] but that does not extend to:

The Ontario Court of Appeal has ruled that, in the case of a "requirement to pay" under the Income Tax Act (Canada) that was issued after a notice of application to appoint a receiver (but before the court heard the application), supported by an ex parte "jeopardy order" issued by the Federal Court of Canada under s. 225.1(1) of that Act,[60] the "requirement to pay" was considered to have been completely executed on the date of its issue, and thus took precedence over other creditors' claims.[61] [62] [63]

Contractual arrangements

Contracts may be assigned elsewhere in the event of a notice of intention of a Division I proposal,[64] bankruptcy[65] or CCAA proceeding.[66] Agreements of any kind can be disclaimed in the event of a Division I proposal[67] or CCAA proceeding,[68] as well as leases in a bankruptcy proceeding.[69]

Critical suppliers may be ordered to continue dealing with companies undergoing a CCAA proceeding, if the goods or services supplied are critical to the company's continued operation.[70]

Anti-avoidance provisions

Attacking questionable behaviour

As in other countries, certain debtors may be tempted to bypass the process outlined above through the transfer of assets from an insolvent company to a phoenix company, thus abandoning outstanding liabilities to creditors. Recent legal developments have made this procedure unattractive, through creditors using the oppression remedy available under the CBCA and similar provincial corporations legislation.[71]

Several procedures are available for investigating companies' behaviour during times of insolvency or other financial difficulty. The BIA provides for examination of relevant parties during the administration of the estate,[72] and the CBCA and similar provincial corporations legislation provides for the court to appoint inspectors to investigate and report back on fraudulent, dishonest, oppressive or unfairly prejudicial behaviour of a corporation.[73] [74] A typical inspector's report can be viewed here.[75]

The court has power to remove one or more of the company's directors, if the court is satisfied that the director is unreasonably impairing or is likely to unreasonably impair the possibility of a viable proposal (or in the case of the CCAA, a compromise or arrangement) being made in respect of the company or is acting or is likely to act inappropriately as a director in the circumstances.[76] [77]

Protection of creditors

Where bankruptcy is sought, it does not necessarily wipe the slate clean on certain debts. Some liabilities are not released upon discharge.[78] Directors and parties related to the bankrupt may still be held personally liable for certain tax debts,[79] and directors can be held accountable for other liabilities.[80]

Certain bankruptcy and CCAA proceedings involve the issue of unpaid wages, severance and termination pay, and other payroll liabilities. The Wage Earner Protection Program Act [81] provides a procedure to claim a portion of the amount due, against which the "super-priority" of the employees on the assets of the estate is subrogated.[82]

See also

Notes and References

  1. Web site: Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3). 2011-08-25.
  2. Web site: Companies' Creditors Arrangement Act (R.S.C., 1985, c. C-36). 2011-08-25.
  3. Web site: Winding-up and Restructuring Act (R.S.C., 1985, c. W-11). 2011-08-25.
  4. Web site: Absconding Debtors Act (Ontario), R.S.O. 1990, c. A.2. 24 July 2014.
  5. Web site: Fraudulent Conveyances Act (Ontario), R.S.O. 1990, c. F.29. 24 July 2014.
  6. Web site: Creditors' Relief Act, 2010 (Ontario), S.O. 2010, c. 16, Sch. 4. 24 July 2014.
  7. Web site: Execution Act (Ontario), R.S.O. 1990, c. E.24. 24 July 2014.
  8. Web site: Scott Bomhof, Torys LLP. Duties of Directors in the Insolvency Zone. 2011-12-14. 2012-04-07. https://web.archive.org/web/20120407012457/http://www.torys.com/Publications/Documents/Publication%20PDFs/AR2010-24.pdf. dead.
  9. Web site: D. Robb English, Paul Bowers and David Carson . Turnarounds: Dealing with the Secured Lender . Aird & Berlis . 2004-09-27 . 2011-09-13.
  10. Web site: Milly Chow . Out-of-Court Restructurings . . 2010-11-16 . 2011-09-07 . https://web.archive.org/web/20120401130931/http://www.blakes.com/english/view_bulletin.asp?ID=4342 . 2012-04-01 . dead .
  11. Web site: CBCA, S. 192 . 2011-09-08 . https://web.archive.org/web/20111114112852/http://laws-lois.justice.gc.ca/eng/acts/C-44/page-64.html . 2011-11-14 . dead .
  12. Web site: Policy Concerning Arrangements Under Section 192 of the CBCA . Industry Canada . 2010-01-04 . 2011-09-13.
  13. Web site: Peter Rubin . Arrangement Provisions of the Canada Business Corporations Act . . 2010-11-16 . 2011-09-07 . https://web.archive.org/web/20120401130935/http://www.blakes.com/english/view_bulletin.asp?ID=4341 . 2012-04-01 . dead .
  14. Web site: Restructuring Under the Business Corporations Act . . September 2009 . 2011-09-08.
  15. Web site: Assignments and Preferences Act (Ontario), R.S.O. 1990, c. A.33 . 2011-09-13.
  16. Web site: Aubrey E. Kaufman and R. Graham Phoenix . Interim Receivers under the BIA: What practicality demands ... for now . . 2007-10-31 . 2011-09-12 . https://web.archive.org/web/20120331014645/http://www.fasken.com/files/Publication/b2d58d89-0bad-44a6-97b2-14f728357d13/Presentation/PublicationAttachment/85794bc1-84d1-4461-8af8-2521f3590497/Interim_Receivers_Under_the_BIA.pdf . 2012-03-31 . dead .
  17. Web site: Process for Division I Proposals . 19 February 2004 . OSB . 2011-08-25.
  18. Web site: The Companies' Creditors Arrangement Act . 5 September 2002 . OSB . 2011-08-25.
  19. Web site: BIA, S. 49 . November 2019.
  20. Web site: BIA, S. 2, definition of "person" . November 2019.
  21. Web site: BIA, S. 2, definition of "corporation" . November 2019.
  22. Web site: Winding-Up and Restructuring Act, S. 6(1) . 22 June 2016.
  23. Web site: Canada Transportation Act, S. 106. 10 June 2020. 8 September 2011. 25 June 2011. https://web.archive.org/web/20110625072607/http://laws-lois.justice.gc.ca/eng/acts/C%2D10.4/page-33.html#h-58. dead.
  24. Web site: BIA, S. 43 . November 2019.
  25. Web site: Martin Boodman. Who Owns a Quebec Partnership?. McCarthy Tétrault. November 29, 2010. November 15, 2013. November 11, 2013. https://web.archive.org/web/20131111214316/http://news.mccarthy.ca/en/news_template.asp?pub_code=5201&news_code=1435&single_page=1. dead.
  26. Alexandra Popovici. 2013. Québec's Partnership: Une Société Distincte. . Louisiana State University Law Center. 6. 1. 339372. 11 November 2013.
  27. Ferme CGR enr., s.e.n.c. (Syndic de). 2010. qcca. 719. 2010-04-16.
  28. Web site: Farm Debt Mediation Act, SS. 12-13 . 17 December 2016.
  29. Web site: Farm Debt Mediation Act, S. 14 . 17 December 2016.
  30. Web site: CCAA, S. 3 . November 2019.
  31. Web site: Winding-Up and Restructuring Act, S. 6(1) . 22 June 2016.
  32. Welling. Bruce L.. Thomas G. W. Telfer. September 1, 2008. The Winding-Up and Restructuring Act: Realigning Insolvency's Orphan to the Modern Law Reform Process. Banking & Finance Law Review. 24. 233. 1309703.
  33. Web site: BIA, S. 66 . November 2019.
  34. Web site: BIA, S. 66.4 . November 2019.
  35. Web site: BIA, S. 67 . November 2019.
  36. Web site: BIA, S. 81 . November 2019.
  37. Web site: BIA, S. 81.1 . November 2019.
  38. Web site: BIA, S. 81.2 . November 2019.
  39. Web site: BIA, S. 83(1) . November 2019.
  40. Web site: BIA, S. 95 . November 2019.
  41. Web site: CCAA, S. 36.1 . 2011-09-19 . https://web.archive.org/web/20111011155219/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-22.html#h-12 . 2011-10-11 . dead .
  42. Web site: John R. Sandrelli, Christopher J. Ramsay and Anjili I. Bahadoorsingh . Remedies under Security Interests in Canada: An Overview . . 2002-09-18 . 2011-09-13 . dead . https://web.archive.org/web/20120329040825/http://www.fmc-law.com/upload/en/publications/archive/12619_Remedies_under_Security_IBA_pdf.PDF . 2012-03-29 .
  43. Web site: Federal Security Interests: Contract #99-08-2 . Fraser Milner Casgrain under contract to the Law Commission of Canada. June 2000 . 2011-09-14.
  44. Web site: Kiriakoula Hatzikiriako . An attempt to "demystify" Québec secured transactions law (Part I) . . Summer 2010 . 2011-09-13 . 2012-03-22 . https://web.archive.org/web/20120322202530/http://www.mcmillan.ca/Files/ARTICLE_An%20attempt%20to%20demystify_ABA_E_0610.pdf . dead .
  45. Web site: Registre des droits personnels et réels mobiliers . 2011-09-13 . https://web.archive.org/web/20111029163840/http://www.justice.gouv.qc.ca/english/programmes/rdprm-a.htm . 2011-10-29 . dead .
  46. Web site: Bank Act (S.C. 1991, c. 46), S. 426. 6 March 2021. 13 September 2011. 17 September 2011. https://web.archive.org/web/20110917100325/http://laws-lois.justice.gc.ca/eng/acts/B-1.01/page-125.html. dead.
  47. Web site: Bank Act (S.C. 1991, c. 46), S. 427. 6 March 2021. 13 September 2011. 29 August 2011. https://web.archive.org/web/20110829074025/http://laws-lois.justice.gc.ca/eng/acts/B-1.01/page-126.html. dead.
  48. Web site: Rebecca M. Morse . Priority Disputes between the Bank Act and Provincial PPSA Legislation . Farris, Vaughan, Wills & Murphy LLP . 2011-09-13 . https://web.archive.org/web/20120402111818/http://www.farris.com/images/uploads/RMM_-_Article_-_Priority_Disputes_Between_the_Bank_Act_and_Provincial_PPSA_Legislation.pdf . 2012-04-02 . dead .
  49. Web site: Robert A. Margolis and Christopher J. Giaschi . Priorities and Bankruptcy in Admiralty . April 2002 . 2011-09-22 . 2012-04-02 . https://web.archive.org/web/20120402193801/http://www.admiraltylaw.com/papers/bankruptcy.pdf . dead .
  50. Web site: BIA, S. 84.2. November 2019. 2011-09-19. 2012-09-18. https://web.archive.org/web/20120918111129/http://laws-lois.justice.gc.ca/eng/acts/B-3/page-63.html. dead.
  51. Web site: BIA, S. 65.1 . November 2019.
  52. Web site: CCAA, S. 34(1) . 2011-09-07 . https://web.archive.org/web/20120916205449/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-20.html . 2012-09-16 . dead .
  53. Web site: Stephen J. Weisz . Insolvency and Restructuring Agreements in an Economic Downturn . . April 2009 . 2011-09-07 .
  54. Web site: Beware Contractual Provisions triggered (even indirectly) by a Party's Insolvency. Anthony Alexander. 2013-06-06. McCarthy Tétrault. 2013-11-04. https://web.archive.org/web/20150218144151/http://www.canadianappeals.com/2013/03/06/the-second-opinion-beware-contractual-provisions-triggered-by-a-partys-insolvency/. 2015-02-18. dead., discussing Aircell Communications Inc. v. Bell Mobility Cellular Inc.. 2013. onca. 95. 2013-02-14., which extended upon C.I.B.C. v. Bramalea Inc.. 1995. onsc. 7420. canlii. 1995-12-13. auto.
  55. Web site: BIA, S. 50.4 . November 2019.
  56. Web site: BIA, S. 62(1) . November 2019.
  57. Web site: BIA, S. 69.3. November 2019. 2011-09-19. 2012-02-22. https://web.archive.org/web/20120222030003/http://laws-lois.justice.gc.ca/eng/acts/B-3/page-51.html. dead.
  58. Web site: BIA, S. 69.31. November 2019. 2011-09-19. 2012-03-06. https://web.archive.org/web/20120306042116/http://laws-lois.justice.gc.ca/eng/acts/B-3/page-52.html. dead.
  59. Web site: BIA, S. 70 . November 2019.
  60. Web site: Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), s. 225.1(1). 6 May 2021.
  61. I. Waxman & Sons Limited (Re). 2010. onca447. 2010-06-17.
  62. Web site: Canada Revenue Agency Trumps Unsecured Creditors!. Weir Foulds LLP. October 2010.
  63. Web site: Case Comment – Re I. Waxman & Sons Ltd.. Cassels Brock. 14 October 2010. 15 November 2013. https://web.archive.org/web/20150610205703/http://www.casselsbrock.com/CBArticle/Case_Comment____i_Re_I__Waxman___Sons_Ltd___i_. 10 June 2015. dead.
  64. Web site: BIA, S. 66(1.1) . November 2019.
  65. Web site: BIA, S. 84.1. November 2019. 2011-09-19. 2012-09-18. https://web.archive.org/web/20120918111129/http://laws-lois.justice.gc.ca/eng/acts/B-3/page-63.html. dead.
  66. Web site: CCAA, S. 11.3. November 2019. 2011-09-09. 2012-09-16. https://web.archive.org/web/20120916205617/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-9.html. dead.
  67. Web site: BIA, S. 65.11 . November 2019.
  68. Web site: CCAA, S. 32 . 2011-09-09 . https://web.archive.org/web/20111012230047/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-19.html#h-10 . 2011-10-12 . dead .
  69. Web site: BIA, S. 30(1)(k) . November 2019.
  70. Web site: CCAA, S. 11.4. November 2019. 2011-09-09. 2012-09-16. https://web.archive.org/web/20120916205617/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-9.html. dead.
  71. Web site: Mark Wiffen . getting blood from a stone – enforcing unpaid corporate judgments against directors . . July 2011 . 2011-09-04 . 2011-07-19 . https://web.archive.org/web/20110719182720/http://www.mcmillan.ca/95997 . dead .
  72. Web site: BIA, SS. 161-167 . 2011-09-15 . https://web.archive.org/web/20111012205410/http://laws-lois.justice.gc.ca/eng/acts/B%2D3/page-85.html#h-47 . 2011-10-12 . dead .
  73. Web site: CBCA, Part XIX . 2011-09-15 . https://web.archive.org/web/20110811043515/http://laws-lois.justice.gc.ca/eng/acts/C-44/page-74.html#h-27 . 2011-08-11 . dead .
  74. Web site: Edmond F.B. Lamek and Andrew Derksen . OBA Remedies Fast Forward - OBCA (and CBCA) Inspectors . . 2011-09-15 . https://web.archive.org/web/20120331014656/http://www.fasken.com/files/Publication/10ff42fd-2a1b-425c-ad7f-25cc5d879f0c/Presentation/PublicationAttachment/fdd631fe-9cc3-42e5-b023-30a0c09714d3/OBCA_and_CBCA_Inspectors.pdf . 2012-03-31 . dead .
  75. Web site: Carling (Inspector under Business Corporations Act) . . 2011-09-15 . https://web.archive.org/web/20120401095101/http://documentcentre.eycan.com/Pages/Main.aspx?SID=28 . 2012-04-01 . dead .
  76. Web site: BIA, s. 64 . November 2019.
  77. Web site: CCAA, s. 11.5. November 2019. 2011-09-08. 2012-09-16. https://web.archive.org/web/20120916205553/http://laws-lois.justice.gc.ca/eng/acts/C-36/page-10.html. dead.
  78. Web site: BIA, S. 178(1) .
  79. Web site: Katherine M. Wellburn and Murray Jamieson . Taking it all away - Traps set for debtors trying to dodge the taxman . 2008-09-18 . 2011-08-25 . 2011-10-05 . https://web.archive.org/web/20111005182101/http://www.canadianlawsite.ca/Bankruptcy_Paper_Taxes.pdf . dead .
  80. Web site: David A. DeGroot. Directors' liability during corporate insolvency. Burnett, Duckworth & Palmer LLP. June 2009. 2011-09-04. https://web.archive.org/web/20120316214532/http://www.bdplaw.com/titanweb/bdp/bdpwebsite.nsf/AllDoc/8981B19B11CADABD852575ED006F9D18/%24File/BDP%20Insolvency%20%26%20Restructuring%20NL%20June%2009.pdf. 2012-03-16. dead.
  81. Web site: Wage Earner Protection Program Act (S.C. 2005, c. 47, s. 1)). 2011-09-04.
  82. Web site: Wage Earner Protection Program. 2011-09-04.

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