On June 3, 2005, the Government of Canada introduced Bill C-55 which provides for comprehensive insolvency law reform through amendments to the Companies' Creditors Arrangement Act and the Bankruptcy and Insolvency Act.  The Government of Canada indicated that the amendments were introduced to achieve four goals:   

1.    to increase predictability in corporate restructurings while preserving flexibility;
 
2.   to protect workers' claims for unpaid wages and vacation pay as well as unremitted pension contributions in insolvencies;
 
3.    to make the bankruptcy system fairer and reduce abuse; and
 
4.    to improve the administration of the insolvency system.
 
The effect of Bill C-55, as currently drafted, is broad ranging and significant.  It provides specific statutory authority for the following:

• In bankruptcies, receiverships and restructurings, employee claims for unpaid wages and vacation pay will be afforded priority above the claims of secured creditors.  Also, employees will be granted a super priority charge over the current assets of the employer for such claims up to $2,000.
• Claims for unremitted pension plan contributions of employees and their employers will rank above the claims of secured creditors in a bankruptcy or receivership.  Any BIA proposal or CCAA plan must provide for the payment of unremitted regular pension plan contributions and ongoing employer pension plan contributions.
• The establishment of the Wage Earner Protection Program to guarantee employees the  payment of unpaid wages up to $3,000 by the Government of Canada if their employer is bankrupt or in receivership.  The Government of Canada will pay the employees promptly and employees will assign their rights to the Government of Canada.
• In CCAA proceedings, debtor companies may seek a court order triggering the mandatory renegotiation of any existing collective agreement.  The court will not, however, have the ability to unilaterally impose a new collective agreement.
• Otherwise, existing collective agreements will remain in full force and effect throughout the restructuring unless the collective agreement is revised consensually between the parties.  It would appear that the court's ability to stay certain rights under the collective agreement will be constrained.
• If the collective agreement is revised or varied by agreement, the union will be entitled to make a claim as an unsecured creditor for an amount equal to the value of any negotiated concessions.
• In both CCAA and BIA proceedings, a debtor company may terminate contracts other than eligible financial contracts, a commercial lease, or a collective agreement although counterparties to agreements which the debtor proposed to terminate will have the right to object.
• A court supervising CCAA proceedings has the jurisdiction to deal with governance issues including the ability to remove and replace directors, to grant a charge in priority to other creditors in respect of the indemnification of directors and officers and to require the CCAA debtor to pay the costs for the participation of interested parties in the restructuring proceeding.
• Courts are authorized to approve interim financing/debtor in possession financing during a restructuring and to grant such financing priority ranking ahead existing secured creditors.  This will codify existing practice.
• A stay of proceedings will be enforced against regulators if regulators are acting as creditors to collect a prefiling debt and may be enforced against regulators in other circumstances.
• CCAA debtors will be required to publish notice of the CCAA proceedings in a newspaper after the restructuring process has commenced.  Monitors will be required to make a list of all known creditors over $1000 publicly available.
• Auditors will not be permitted to act as monitors.
• A prohibition on the ability of claims relating to the purchase of equity interests to vote on any proposed restructuring arrangement.

In addition, there are considerable amendments to the consumer bankruptcy process.  
 
Certain of the proposed amendments codify current CCAA practice, however, many of the proposed amendments represent a significant change in the CCAA.  While the stated goals of the proposed legislative reform are commendable, they come at the cost of reducing the flexibility and responsiveness of both debtors and supervising courts which may inhibit or preclude a successful restructuring and may not maximize recovery for stakeholders.  CCAA restructuring proceedings have been notable in the ability of the regime to adjust to the needs of the affected stakeholders, including employees, due to the lack of rigid framework of rules.  This has encouraged the innovative and creative results seen in many Canadian restructurings.  In addition, the amendments alter the tension between the stakeholders and debtor which currently exists and which can lead to effective, equal negotiation and ultimately, acceptable compromise.  

The proposed amendments will also affect current banking and lending practices as lenders adjust margins and availability to account for the proposed super priority to be granted in favour of employees and certain pension liabilities.  For businesses in labour intensive industries, these proposed amendments may significantly diminish their ability to obtain financing.  For lenders, the proposed amendments will require the lender to closely monitor the payroll and pension contributions of borrowers, increasing the cost to administrate facilities.

Bill C-55 is currently in the early stages of the legislative process and will be subject to debate and further review prior to coming into force.
 
 
For further information, contact Natasha MacParland (416.863.5567), Jay Swartz (416.863.5520), Mark Schrager (514.841.6530) or Denis Ferland (514.841.6423).
 
Davies Ward Phillips & Vineberg LLP, with over 225 lawyers, practices nationally and internationally from offices in Toronto, Montréal, New York  and Paris, and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments contained herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances.  For particular applications of the law to specific situations, the reader should seek professional advice.
 
 

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June 6, 2005