The Corporate Insolvency and Governance Act (the CIG Act) received Royal Assent on 25 June and effects wide ranging changes.. Further to our briefing note ' Corporate Insolvency and Governance Act How do the new protection of supplies of goods and services provisions work', we focus on the provisions in the CIG Act that are most relevant to the construction industry - those. Crown Interests. Marginal note: Status of Crown claims 86 (1) In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province or of any body under an Act respecting workers’ compensation, in this section and in section 87 called a “workers’ compensation body”, rank as unsecured claims. Marginal note: Enforcement of orders of other courts (1) An order made by the court under this Act shall be enforced in the courts having jurisdiction in bankruptcy elsewhere in Canada in the same manner in all respects as if the order had been made by the court hereby required to enforce it.. Marginal note: Courts to be auxiliary to each other (2) All courts and the officers of all courts.
If a payment is made to an employee by Service Canada, then Service Canada will be entitled to any dividend payments made by the Receiver or Licensed Insolvency Trustee to the employee, up to the amount paid by Service Canada. The Licensed Insolvency Trustee will call the first meeting of creditors within 21 days of the date of Bankruptcy by sending out a notice to all known creditors. You may also check the relevant PwC website for a copy of the notices that have been mailed to creditors.
As a creditor, you will be given the opportunity to file a proof of claim with the Licensed Insolvency Trustee prior to the meeting. A proof of claim must be filed prior to the meeting in order for you to be eligible to vote at the meeting. Information on the Sales Process may also be available on the PwC website. It can be a multi-year process. All rights reserved. Please see www. Q: Who is the Licensed Insolvency Trustee?
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PwC Ventures. An automatic stay of proceedings is granted for claims against the debtor. A significant difference is that, as the proposal process operates under the BIA, the claims of secured creditors are not affected and secured creditors can therefore realise against the assets of the debtor concurrent with the proposal. Under the BIA, the stay is automatic upon the issuance of a notice of intent or when the proposal is made to creditors. Under the CCAA, a court-ordered stay of proceedings triggers a stay upon the granting of the application by the court.
While there is a stay of proceedings, the debtor continues to operate as a going concern under the full control of the existing board and management. A stay of proceedings is 30 days initially and may be extended by day increments for up to six months. If a proposal by a debtor is rejected by its creditors and the proceedings convert from restructuring proceedings to insolvency proceedings, then the stay of proceedings will apply only to unsecured creditors and not secured creditors.
Under the BIA, an insolvent person, the receiver of an insolvent person's property or a bankrupt or trustee of the estate of a bankrupt will file either a proposal to creditors under the terms listed in Part III of the BIA or a notice of intent with the bankruptcy superintendent.
Both processes have the effect of putting creditors on notice of the debtor's intent to restructure; they must be made to all unsecured creditors and may be made to secured creditors.
Following the filing of either a formal proposal or a notice of intent, a proposal trustee is appointed to oversee the process and assist the debtor in preparing and overseeing the proposal. The proposal trustee has a statutory duty to report on the debtor's cash flow and advise the court of any adverse material change. The filing of a notice of intent automatically triggers a day stay of proceedings, which can be extended for 45 days at a time for up to six months from the start of the initial day stay.
If this six-month maximum is exhausted and a proposal still has not been filed by the debtor, bankruptcy occurs automatically. If a notice of intent has not been filed, the stay of proceedings is triggered when the proposal is made to the creditors. To obtain a stay extension, the debtor must satisfy the court that:. If the debtor proceeds via a proposal to its creditors, the creditors must vote either to approve or to reject the proposal. If the proposal is approved, the debtor's obligations to the creditors for the amounts owing prior to the date of the proposal are dictated via the proposal.
Any new debt obligations that the debtor accrues as of the date of approval of the proposal are dictated by terms agreed outside the proposal.
However, if the proposal is rejected, the meeting of creditors either to accept or reject the proposal becomes the first creditors' meeting in bankruptcy proceedings. Under the CCAA, to commence restructuring proceedings, a debtor must make a court application and meet the minimum statutory requirement of:.
A stay of proceedings is triggered when the application is granted by the court. The initial limit on the stay of proceedings is 30 days; this can be extended at the court's discretion to typically either 60 to 90 days.
Unlike under the BIA, there is no restriction on the total duration of the stay of proceedings. Further, there are statutory limitations on the scope of restructuring actions that may be undertaken.
Such limitations include:. The debtor is subject to court supervision and is restrained from disposing of its assets outside the ordinary course of business. Directors of the debtor: The general fiduciary duty, including a duty of loyalty and duty of care, is owed by the directors to the debtor during the restructuring proceedings.
Further, the directors must continue complying with obligations under securities, environmental, tax and employment law.
Shareholders of the debtor: The liability of shareholders in Canada is restricted to the value of the interest in their shares. Generally, shareholders cannot be held liable for the liabilities of a company. However, there are statutory exceptions to this rule — for example, where a shareholder is found to have been in control of a company's business that is found to have violated environmental obligations.
There are also exceptions where the corporate veil may be pierced, including for shareholder wrongdoing such as fraud. Creditors: Creditors have the right to accept or reject a proposal for restructuring.
When voting on the proposal, for a proposal to be binding on a given class, it must be approved by a two-thirds majority of a dollar value in that class. If such a majority is obtained, the vote binds all creditors in that class. Secured creditors: Secured creditors are granted a variety of rights and remedies, depending on the context of the insolvency proceedings and the governing statute.
These rights and remedies are predominantly governed by contract. Unsecured creditors: Unsecured creditors typically have the fewest rights and corresponding responsibilities in restructuring proceedings, and are often left with little to no disbursement of assets.
Employees: Restructuring proceedings often involve some level of workforce reduction. Employees who continue to work in the normal course are entitled to the same wages and benefits. Employers must adhere to applicable labour and employment standards throughout the restructuring process.
For unionised employees, collective agreements remain in force, although unions may be asked to reopen bargaining agreements as part of the process. Pension creditors: Pension plans are considered to be separate from the general assets of a corporation and cannot be drawn on to satisfy debts or operating expenses. Formal restructuring orders often contain provisions to permit continued contributions to benefit plans and payments to current retirees. Defined benefit plans are often underfunded by companies on the verge on insolvency.
Insolvency officeholder if any : All insolvency officeholders are impartial fiduciaries and must be licensed through the Office of the Superintendent of Bankruptcy. The main role of these officials is to report to the court on the status of the debtor and to provide strategic and financial recommendations. Court: Formal restructuring proceedings necessarily involve some level of court supervision. Depending on the complexity of the proceedings, frequent attendance before the court may be required to approve administrative processes or to dispute claims between stakeholders.
Under a BIA proposal or a CCAA plan, creditors can generally be crammed down only if the dissenting creditor is in a class of creditors that approves the proposal or plan. Creditors are separated into classes for the purposes of voting in the proceedings. Creditors are classified by the debtor at first instance, but may be challenged and determined by the courts.
Classes of creditors must have a commonality of interest to be classified as a class. In order for a proposal to be approved by a class, it must be passed by a two-thirds majority of the dollar value of the respective class. The restructuring powers of the BIA are subject to the rights of secured creditors and therefore cannot be used to compromise secured debt. Similar restrictions do not apply under the CCAA. Both acts permit the debtor to disclaim most types of agreements by delivering notice in the prescribed format.
The counterparty to such an agreement may file a claim for damages that result from the disclaimer. However, certain contracts cannot be disclaimed. An example of a contract that cannot be disclaimed is a collective agreement. Liabilities of third parties can be released through restructuring proceedings. In certain instances, such releases are incorporated into corporate plans of arrangement. However, third-party releases are restricted to those that contributed to the proceedings in a material way.
Debtor-in-possession DIP financing is available in the context of formal restructuring proceedings. DIP financing is typically granted with court approval and the court may exercise its discretion to grant a super-priority charge in favour of the debtor. Restructuring proceedings conclude when a BIA proposal is formally approved by the creditors.
Dissenting creditors within a class accepting the proposal are bound by it. Once approved by a two-thirds majority in value of the creditors, the proposal must be approved by the court. Hence, the restructuring proceedings conclude following the court's approval. Under the CCAA, the plan of compromise and arrangement must also be approved by the creditors at a creditors' meeting.
Similarly, to be accepted, the plan must be approved by two-thirds in value of the creditors. The creditor-approved plan must then be approved by the court. To be approved by the court, all statutory requirements of the CCAA must be met and the plan must be fair and reasonable. The benefits of the various procedures under the BIA are that they are consumer-initiated, structured processes. They also tend to be cheaper and more efficient than other options. Another major benefit is that the priorities of claims under the BIA differ from those under other legislation, which means that a creditor can choose to decide what process to take depending on where it has the most debt.
For example, under the BIA, debts owed to the crown become unsecured claims, which are positioned low down the list of priority of claims. The major drawback of the various procedures under the BIA is their rigid nature: although they are consumer initiated, they include little flexibility in terms of pay-outs. Further, courts have less discretion under the BIA than in other options. Receivership: Normally appointed by a court, a receiver is responsible for overseeing the proper distribution of an insolvent party's assets.
The factors that a court typically looks for include the following:. The benefit of receivership is that it is a flexible process. The drawback is that it is controlled by the secured creditors. A court-appointed monitor, which must be a LIT, is appointed to oversee the restructuring in this process.
The monitor's duties include reporting to the court on the debtor's cash flow and restructuring. Furthermore, the monitor is required to advise the court of any material adverse change in the debtor's financial condition. The benefits of proceedings under the CCAA include the flexibility of the rules, the duration, the timelines, the limited procedural requirements and the court's discretion.
The drawback is that all of the factors that are advantageous to the debtor are typically disadvantageous to secured creditors. Another drawback is that CCAA proceedings are expensive for the debtor. The process does not require attendance at court or the appointment of an administrator. The CBCA is also attractive to corporations that want to avoid public scrutiny. A key drawback is that, as a corporate statute, the CBCA does not provide for a general stay of claims and cannot be used to compromise unsecured claims.
The benefit and drawback of the WURA is that it limits entities in certain sectors in the process that they can follow in case of insolvency. Insolvency proceedings can be initiated by both secured and unsecured creditors via the BIA, through receivership or through bankruptcy proceedings. A secured creditor may initiate involuntary restructuring where there has been a default or an unpaid obligation by the debtor, and the secured creditor has made a demand for payment and given the debtor a reasonable timeframe to respond to the demand.
An unsecured creditor may initiate involuntary restructuring proceedings. However, an unsecured creditor must first obtain a judgment through a court process.
Where such a judgment goes unsatisfied by the debtor, the unsecured creditor may commence insolvency proceedings with a view to satisfaction of such judgment. Where a debtor becomes bankrupt, its property vests in the trustee in bankruptcy, subject to the rights of secured creditors. The debtor is restrained from disposing of property or from otherwise dealing with its assets.
All claims by unsecured creditors are automatically stayed against the debtor. Unsecured creditors can assert claims by submitting a proof of claim form to the trustee.
Receivers are typically appointed on application by a secured creditor. A receiver has the right to take possession and control of the debtor's assets, and to sell them. In some circumstances, a receiver may be appointed to manage the debtor's business for a certain timeframe. A court-appointed receivership order typically provides for a stay of proceedings against the debtor, in order to facilitate a more stable realisation. Liquidation proceedings trigger a stay of proceedings.
In bankruptcy, the stay of proceedings is statutory. In receivership and CCAA proceedings, the stay of proceedings is effected pursuant to a court order. The general rule is that liquidation proceedings result in the removal of the board and its replacement by a trustee in bankruptcy, which takes control of the company's business and assets.
The sole exception to the rule is in CCAA liquidations, where the board and management of the debtor remain in place under the supervision of the court-appointed monitor. There are three ways to liquidate an insolvent company in Canada. The first is through bankruptcy under the BIA. The second is by way of receivership under the BIA. The third is led by the debtor in possession under the supervision of a court-appointed monitor under the CCAA, without the cooperation of the debtor's main secured creditors.
The process of bankruptcy under the BIA may be voluntary or involuntary. It is commenced in one of three ways:. The duration of bankruptcy or receivership proceedings is not time limited. Debtor: All assets of the debtor vest in the trustee in bankruptcy. A receiver is similarly entitled to seize and sell assets. The debtor is restrained from disposing of property and preferential payments made shortly before the date of bankruptcy may be clawed back.
Directors of the debtor: Depending on the circumstances, the insolvency administrator may take over control of the corporation in place of directors and management. Generally, corporate directors' duties of care continue to apply during insolvency proceedings. Shareholders of the debtor: Shareholders have limited capacity to participate in insolvency proceedings and rarely see returns. Secured creditors: Secured creditors are generally unaffected by proceedings under the BIA.
Receiverships are often used as enforcement remedies by secured creditors. Unsecured creditors: Claims by unsecured creditors are stayed during insolvency proceedings. Administrator: The obligations of professionals acting as insolvency administrators vary significantly by role. Generally, insolvency administrators must be professionally licensed through the Office of the Superintendent of Bankruptcy.
In most court-appointed roles, insolvency administrators are court officers with fiduciary duties. Employees: All employment agreements are considered to be terminated in bankruptcy proceedings. Employees will be retained only where necessary and will be paid in ordinary course pursuant to a court order. The claims of employees have a super-priority charge against the debtor for wages in arrears for the last six months, excluding termination and severance pay.
A super-priority charge also applies to certain deducted but unremitted employee pension contributions and prescribed pension plans. Employees will be compensated by the federal government, pursuant to the federal Wage Earner Protection Programme Act, for wages in arrears, termination pay and severance pay.
Pension creditors: Pension funds, to the extent that they are properly funded, are considered to be separate from the general assets of a corporation and cannot be drawn on to satisfy creditor claims. Unfunded portions of plans are subordinated to other claims, often seeing little to no return. Statutory deemed trusts in favour of pensioners have generally been held to be ineffective. Insolvency officeholder: The roles of trustees are largely statutory and are governed by the BIA and the common law.
However, receivers and monitors are court appointed, and the breadth and scope of their roles are defined by orders of the court. Information officers are a creation of common law. Court officers are independent parties with fiduciary duties. These officers report directly to the court and are expected to make regular reports. Such reports, when they are not deemed to be confidential, will be relayed to the stakeholders in the proceedings. Court: Bankruptcy proceedings and most receivership proceedings are court supervised, though less frequent attendance before the court is required than in formal restructuring proceedings.
In order to file claims in insolvency proceedings, both debtors and creditors must meet certain criteria to have standing to commence the proceeding. A debtor may initiate voluntary liquidation by filing an assignment for the general benefit of its creditors.
This is filed with the official receiver and includes a sworn statement listing all of the debtor's assets and liabilities, the names and addresses of its creditors, and the amounts owing to those creditors. Alternatively, creditors may initiate an involuntary liquidation by filing an application for a bankruptcy order with the court. The court must be located in the principal jurisdiction in which the debtor conducted business or resided in the year preceding the date of the application.
Under the CCAA, filings for the liquidation of a debtor's assets are normally made by the debtor. A debtor's assets can also be liquidated through receivership. This process is typically an involuntary proceeding commenced by a creditor.
The commencement of insolvency proceedings does not automatically result in the termination of existing contracts. The BIA and the CCAA provide that the debtor has the right to terminate and abandon contracts to which it is a party as of the date of filing. The trustee and the receiver are given a prescribed timeframe to accept or disclaim contracts, and have no obligation to accept or perform a contract.
Upon the rejection of a contract, the counterparty will have a claim for damages that will be permitted to be proven in the proceedings. The counterparty may be entitled to terminate the contract of its own accord, on the basis of a material adverse change or similar clause in the language of the contract. Yes, transactions entered into by the debtor prior to becoming insolvent can be challenged and set aside using various provisions of the BIA and the WURA.
Such transactions may include undervalued transfers, preferences, share redemptions and payment of dividends.
The oppression remedy and tort law claims may also be used to challenge transactions. Generally, any creditor may have standing to challenge transactions.
Standing to challenge transactions depends on the method chosen. The debtor also has the ability to challenge a transaction, particularly in bankruptcy and receivership proceedings. The length of the look-back period depends on how the transaction is being challenged and is specified in the BIA.
Preferences have a look-back period of three months, or 12 months if the parties to the transaction were not at arm's length. Undervalued transfers have a look-back period of 12 months, or five years if the parties were not at arm's length. Share redemptions and dividend payments have a look-back period of one year. The limitation period for civil actions in Ontario is two years from the date of discoverability. The debtor can rebut allegations of preferential payments or transfers at an undervalue by adducing contradictory evidence.
In order for the court to order that a payment was unlawful, the party asserting this claim must prove the claims according to certain statutory criteria. An effective defence is to adduce evidence to rebut each criterion. Insolvency proceedings typically conclude with an application for the discharge of the court officer. This discharge includes approval of activities and the passing of accounts, as well as an order of discharge. Liquidation procedures are formally approved if they are compliant with the BIA.
If the action was brought under the CCAA or via a court-appointed receiver, it is governed by the courts and any liquidation is subject to court approval. Certain liabilities cannot be discharged through insolvency proceedings. For instance, employee source deductions survive CCAA restructurings and certain contingent or unliquidated claims cannot be discharged through any insolvency regime.
Recent case law developments have also clarified that some regulatory orders — in particular, environmental clean-up orders — cannot be discharged. Canadian courts recognise foreign restructuring proceedings according to principles of comity. Generally, foreign debtors cannot avail of Canadian insolvency regimes if they do not have an establishment in Canada. Courts often enter into cross-border protocols with the aim of coordinating foreign and domestic proceedings. Cross-border cooperation is particularly strong between Canada and the United States: courts conduct joint hearings and adopt shared protocols and guidelines to streamline the large number of shared cases see the Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, published by the American Law Institute.
For example, parties may contract out ex ante or the parties may abide by the jurisdiction of another court ex post.
Courts become crucial in the determination of the validity of cross-border instruments in case of a conflict of law. Canadian insolvency filings commonly include multiple affiliated entities. This is particularly effective in CCAA filings to effect a restructuring of a broader corporate group. Such proceedings will be procedurally consolidated, although substantive consolidation is rare. Generally, it is presumed that the debtor's COMI is located in the jurisdiction of its registered office; the debtor can rebut this presumption.
Foreign creditors are treated similarly to domestic creditors in Canada, with minor differences. For example, a foreign creditor may receive preferential treatment through longer notice periods, but may also be subject to the added requirement to provide security for costs. The duties of the directors of a debtor which is in the zone of insolvency or is actually insolvent are regulated by federal and provincial legislation, as well as by common law decisions.
The duties imposed are generally applicable regardless of whether the company is financially troubled. If the conduct of the directors or officers falls below the standard required in the circumstances, they may be held liable.