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Legislative Limbo

In the midst of worldwide economic turmoil Canadian insolvency laws remain in a state of flux
|Written By Kelly Harris
Legislative Limbo

The news of Canadian companies seeking bankruptcy protection, or making filings under the Companies’ Creditors Arrangement Act, seems to be almost a daily occurrence. While the world is gripped in what some have now dubbed as “the Great Recession,” Canadian laws covering financially embattled companies and individuals seem trapped in legislative limbo.

Passed through the House of Commons, and at press time they sat largely unproclaimed with no timeline as to when they’ll be brought into force.

In December 2007, the federal government brought in amendments to Canada’s insolvency law. The changes were largely based on those sought by the previous government and generally follow Canadian court decisions.

Bill C-12, “an act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act, and chapter 47 of the Statutes of Canada, 2005,” was modeled after bill C-55, which died on the order paper when the 2005-2006 federal election was called.

Aside from amending the Bankruptcy and Insolvency Act, the new legislation seeks to create guidelines for the Companies’ Creditors Arrangement Act.

The CCAA allows financially troubled corporations to restructure their financial affairs through a formal plan of arrangement. This can aid a company in avoiding bankruptcy and allow the companies’ creditors to receive some form of payment in the process.

The CCAA is seen as the Canadian counterpart to the United States Chapter 11 bankruptcy code. However, it has become a common refrain that the CCAA is like Chapter 11 without rules. It is a criticism that is not entirely off base, though some of those involved in the field view this as a positive aspect of the Canadian law.

Jay Carfagnini, a partner with Goodmans LLP and head of the firm’s corporate restructuring group, says he has seen an evolution of laws covering financially embattled companies mainly through court decisions. “The courts, the profession, and the business [have] kind of led the practice to those practical results and the law caught up to it afterwards, certainly in the large restructurings,” he says.

“The latest amendments to the CCAA and the Bankruptcy and Insolvency Act mirrored what the law was in Canada, because it mirrored the judge-made law, the benefit of course in putting it into the legislation is that in one sense it codifies it so there [are] no misunderstandings, so you can’t leave it to the interpretations of a single court to affect a different result if they wish to.”

That, says Carfagnini, puts him in two minds about the latest amendments. On the one hand, they create guidelines to follow, and do not leave the decisions up to individual judges. On the other hand they take away the flexibility of Canadian law.

“Whenever you codify in this arena you run the risk of making the statutes a little less flexible, maybe that is what they are trying to achieve, or the balance they are trying to achieve. So there would be proponents of both views depending on the circumstances including myself. I think there is a benefit to articulating certain things clearly and codifying them, and I also think that you don’t need to.

“Because that is where the creativeness of the Canadian practice [is] and really has been one of our stalwart qualifications, we have been able to fashion results that might not have been able to have been achieved, to the benefit of all stakeholders.”

Jeffrey Carhart, a partner with Miller Thomson LLP, says the amendments awaiting proclamation into force generally fall into three different categories. First, as Carfagnini says, there are rules that codify judicial decisions. Secondly, there is new law that a government is writing.

The Wage Earners Protection Act could be an example of a new law. The third case is when the government writes law to reverse a judicial decision.

The sentiment was echoed by Bennett Jones LLP national bankruptcy and restructuring practice co-leader Richard Orzy. He points to “the limitations with insolvency, particularly the CCAA, one of the problems always has been . . . a lack of rules meant that we had lots of cases where new law was being made each day.

Particularly in the period running from the 1990s to the early 2000s, a lot of new law everyday, with new things and some of them really had to be clawed back by litigators.”

The Supreme Court of Canada decision in GMAC Commercial Credit Corp. Canada v. TCT Logistics Inc. is an example of judge-made law the legislation seeks to change.

Carhart says the case determined an interim receiver can be the successor employer and as such was beholden to the previous company’s employment contracts.

It said a bankruptcy court doesn’t neccesarily make the final decision in such matters and would allow a union to go to the labour board to determine successor receiver status. Carhart says this was always an option, however, the new law set the bar to seek leave to go to the labour board on such matters very low.

At issue with TCT, says Carhart, is it goes against the Canadian tradition of promoting options to keep financially struggling companies afloat and protect jobs until a successor owner can be found. By setting a low bar, potential interim receivers may shy away from these companies, leaving the financially embattled with no other option than to declare bankruptcy.

 “Canada was always good at trying to protect the enterprise value of companies,” he says. “Trying to save the going concern value and this is a real attack on that process that worked well for decades and, I would think, saved countless jobs that would have been lost if those companies just closed their doors.”

In bill C-55, there was an attempt to remedy the situation but it did not go far enough. In bill C-12, “the drafters took another stab at ‘fixing’ wording in the new legislation and it is now better,” says Carhart. However, he adds, even though a possible remedy has been passed into legislation, because it is not yet enacted it does little to help the situation.

Edward Sellers, chairman of Osler Hoskin & Harcourt LLP’s insolvency and restructuring practice group, recalls the criticism that the CCAA is like the U.S. Chapter 11 bankruptcy law, but “without rules.” He says the changes awaiting implementation may “not be perfect,” but, like Carfagnini says, they define the playing field.

They provide the rules and create a legislative backdrop with clearly defined rules for those contemplating restructuring. Regardless of whether you agree with the rules, it is important to be able to know exactly what they are, says Sellers.

“The reality is we really need that legislation to be proclaimed into force so that people have that backdrop, to be able to get that level of clarity that frankly most of our major trading nation partners have.”

Will the supplier be around? Will the company you are supplying have the cash to pay the bills? These are the issues counsel will tend to look at when putting together contracts, Sellers says. “It is in those circumstances that the lack of clarity or certainty with respect to the future legal framework for insolvency matters really comes into the fore for in-house counsel.”

This can leave corporate counsel asking themselves, “how am I going to put in place a three-year, five-year contract and adequately deal with the risks of certain aspects of that contract if I don’t know what the rules are?”

Sellers also points to the TCT decision as an example of a court decision affecting the way Canadian business is operating, saying secured lenders may be more risk averse to step in or appoint an interim receiver. Rather the situation promotes debtor in position strategies under the CCAA.

“There is some language within the new legislation that tries to limit TCT and similar types of approaches,” Sellers says. “How it will play out in the courts is anybody’s guess, it certainly appears from the legislation, a successor employer liability would be much less of a concern.

Perhaps then, after the legislation [is] proclaimed, we’ll see secured creditors deciding it is worth it to stay in greater control, through appointing an interim receiver then they had historically done.”

Kevin McElcheran, a partner with McCarthy Tétrault LLP’s national bankruptcy and restructuring group, says, “it’s kind of a funny position to be in when there is legislation that has passed but not in force. It leads to questions about if you are thinking of filing you may wonder if whether which insolvency law will apply to the filing.”

Tony DeMarinis, co-chairman of Torys LLP’s restructuring and insolvency practice, also believes we have seen an evolution in insolvency and restructuring law, and not a revolution. Many of the amendments awaiting enactment are based on court decisions and what the amendments in fact do is reaffirm law judges are already writing.

“I’m not so sure if anything in those [amendments] in limbo by changes is particularly momentous,” he says. “They are more a confirmation and reflection of the state of law in Canada.”

Canadian Lawyer InHouse requested a timeline for the implementation of bill C-12 from Industry Canada. In an e-mail response, Industry Canada spokesperson Michel Cimpaye wrote, “there is no established timeline. The government recognizes the importance of having modern insolvency laws and is committed to bringing the insolvency reforms into force.”

So the history of bill C-12 seems to be legislation first presented by a Liberal government, then reintroduced in largely the same form by a Conservative government. While not perfect, the amendments create guidelines in the CCAA allowing it to be more in line with its U.S. counterpart.

These amendments and guidelines were created through court rulings so it’s legislation following the rule of law. Yet, despite these factors, the law still stands in a state of limbo. A clue to that puzzle may be found in the history of the law in Canada.

“Comparatively speaking, Canada has probably spent more time and more energy trying to bring various parts of our [bankruptcy and insolvency] laws up to date than most other countries,” says Jacob Ziegel, a professor emeritus at the University of Toronto.

Ziegel was part of a group of insolvency law scholars that reviewed bill C-55 in its original form before it died on the order paper. His group presented a 90-page document calling into question various parts of the law, but mostly Ziegel is concerned with how the law is designed in Canada in the first place.

He says all of this points to the need for an ongoing review process to look at the laws, rather than subjecting very delicate statutes to the whims of politics. He doesn’t lay blame on a single government or political party for confusion and the process around the laws.

Rather, Ziegel blames them all. “We haven’t done it in a very transparent and rational manner,” Ziegel says. “I put the blame completely at the feet of the politicians.” It is easy to understand Ziegel’s non-partisan scorn, considering six of the last seven elected prime ministers, from across the political spectrum, have tried to amend the laws.

The Bankruptcy Act came into force in Canada in 1949. It stood largely unchanged for the next 17 years, a relative period of calm for the law. In 1966, the federal government made changes to the act and commissioned the “Report of the Study Committee on Bankruptcy and Insolvency Legislation,” known as the Tassé Report.

The Tassé Report concluded in 1970 and recommendations from that report were incorporated in bill C-60 in 1975. The legislation was nearly as monstrous as bill C-55 presented 30 years later, and contained 139 amendments.

Bill C-55 had 140 pages of amendments. Ironically bill C-60 suffered the same fate as bill C-55 and died on the order paper, when the Liberal government that introduced it fell in the 1979 election.

Following a return to power in 1980, the Liberal government introduced bill C-12. The legislation did not receive second reading until 1983 and it too died on the order paper when the 1984 election was called. In all, between 1975 and 1984, three different committees were struck looking at amendments to the act. There were six different omnibus bills introduced during those nine years. All died on the order paper.

After a brief reprieve, the legislative Pandora’s box was reopened in 1988. The Progressive Conservative government of the time published a report, “Proposed Revisions to the Bankruptcy Act.” Bill C-22 was created following the report and was brought forward to target key areas to revise Canada’s aging bankruptcy law.

Those areas included wage claims, secured creditors and receivers, commercial reorganizations, consumer proposals, consumer bankruptcies, Crown priority, and unpaid suppliers.

The legislation also created a parliamentary committee to review the laws every three years. The committee would be known as the bankruptcy and insolvency advisory committee. The law was finally brought into force in June 1992.

The legislation stood untouched for five years and, in 1997, the Liberal government of the time proposed Bill C-5 refining Canada’s bankruptcy laws once again. This time the bill made changes to the Companies’ Creditors Arrangement Act.

It contained new provisions relating to international insolvencies and securities firm insolvencies. Parts of Bill C-5 were brought into force in 1997 with the final statutes being implemented in 1998. Seven years later, then-prime minister Paul Martin introduced 140 pages of amendments to bankruptcy and insolvency laws, under the distinction of Bill C-55. That legislation was the basis for the present bill C-12.

It is interesting that while so many governments have sought changes to insolvency and bankruptcy laws, only two since 1966 have been successful in bringing the acts into force. As it stands, bill C-12 has brought some of its amendments into law. One such part is the Wage Earner Protection Program Act or WEPP.

The WEPP is designed to use government funds to satisfy claims of eligible workers, up to prescribed maximum amounts, for unpaid wages, vacation pay, severance pay, and termination pay owed to them when their employer declares bankruptcy or becomes subject to a receivership, says WeirFoulds LLP associate Paul Guy.

In-house counsel and corporate boards looking at bankruptcy, restructuring, and insolvency amendments passed, yet not in force, may be left scratching their heads as to what laws to follow.

The changes may sit in limbo in Ottawa, but in the boardrooms of the country they are often being put in practice, Sellers says.

“There are some differences between current practice and what the legislature has decided to enact,” he says. “But on a general basis it’s pretty much the case that people are starting to frame their approach to cases in anticipation of the legislation coming into effect.

 “Even though this legislation hasn’t been proclaimed, it is starting to have an impact on the way cases are starting to be prepared.”

Stikeman Elliott LLP insolvency and restructuring group co-head Sean Dunphy offers his opinion on the status of the legislation and when he thinks it will come into force.

“I’ve stopped trying to be a prophet. It’s been just around the corner for the last three or four years and at a certain point you just lose your interest . . . until you know they are serious.”