Law Times

www.lawtimesnews.com Page 10 March 31, 2008 / Law TiMes Bill C-12 passes revisions don't change thrust of 2005 law T he absence of fanfare was surprising given the tortuous history of the federal government's attempts to implement insolvency reform in Canada, but the passage of Bill C-12 late in 2007 gives some air of reality to the prospect that the reforms will become law soon. Bill C-12's passage comes more than two years after the govern- ment enacted a comprehensive package of amendments to the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act in 2005. The original version of the legisla- tion, however, was never pro- claimed because the Senate agreed with criticisms that it was technically flawed. For the most part, the revi- sions are technical and do not impact the thrust of the 2005 law. Among the main features of that law was the creation of a wage-earner protection plan to ensure payment of unpaid wages owing to employees of an insolvent company. The plan creates a superprior- ity charge over debtors' current assets to secure unpaid wages up to $2,000. It also creates a second superpriority charge over all the debtors' assets to secure unpaid normal cost pen- sion contributions. "What happens is that the government pays the employees and then steps into the employ- ees' shoes as a creditor, going forward," says Kate McNeil of McCarthy Tétrault LLP's Toronto office. Both superpriority charges would rank ahead of pre- existing security. "This is a credit issue that didn't exist previously," says Susan Grundy of Blake Cassels & Graydon LLP's Toronto office. "Businesses and lenders will have to take these charges into account, even when a company is not in trouble." Still, much of the panic that existed when the plan first loomed three years ago has subsided. "I do think that credit will be reduced by the amount of the charge," says Virginie Gauthier of Ogilvy Renault LLP's Toronto office. "But at this point, with the legisla- tion having been out there for a few years, I don't think it will effect a drastic change on existing lending practices. "One of the reasons that the changes aren't drastic is because the risks are largely measurable. And as a practi- cal matter, employees receive their unpaid wages in many large commercial insolvencies in any event." The plan, however, does impose obligations on businesses to provide certain information to government and employees regarding pay and benefits, fail- ing which criminal sanctions may be imposed. While the government has indicated that the plan could come into effect as early as June 2008, Gauthier believes that's unlikely. "Representatives from Industry Canada and from the Superintendent of Bankruptcy's office, speaking informally, have told me that they're targeting this fall," she says. Otherwise, the 2005 amend- ments codify much of the Creditors Act jurisprudence. In particular, they specifically allow courts to authorize debt- or-in-possession financing and the sale of assets, and permit debtors to disclaim or assign certain contracts. The amendments also pro- vide protection for collective agreements and intellectual property licenses, allow receivers to exercise power nationwide, limit the rights of equity claim- ants in restructurings, and adopt procedures for cross- border insolvencies based on a UNCITRAL model law, which forms the basis of Chapter 15 of the U.S. Bankruptcy Code and has also been adopted in other countries. While, as stated, the draft revisions passed in December tend to be techni- cal in nature, they do have practical implications. To begin with, the revi- sions clarify the scope of the charge for unpaid wages, originally criticized as too broad and uncertain. The new language reverts to cus- tomary terminology, defin- ing current assets as "cash, cash equivalents — including negotiable instruments and demand deposits — inven- tory or accounts receivable, or the proceeds from any dealing with those assets." The amendments also make it clear that a debtor cannot circumvent the plan by selling assets in a restructur- ing. Debtors will have to sat- isfy the court that Wage Earner Protection Program Act obliga- tions will be honoured before courts will approve the sale. Otherwise, receivers and trustees will be allowed to pay employees unpaid wages, but the superpriority claim will be reduced to the extent of these payments. The new law also reverses jurisprudence that suggested receivers and trustees could be personally liable for the debtor's obligations, and deemed suc- cessor employers under labour laws. It's now clear that no such personal liability will result for pre-appointment liabilities. "But the successor protec- tion extends only to trustees and receivers, and purchasers of insolvent business will still have to do their due diligence in respect of these potential liabili- ties," Grundy says. Advance notice is now man- datory to all secured creditors affected by a priority charge for DIP financing, which has been limited to securing new loans made after the com- mencement of the insolvency proceedings. Among stakeholders, the distressed debt market is par- ticularly pleased with the latest revisions: gone is a 2005 amend- ment prohibiting buyers of claims from voting the claim in creditors at proceedings unless the whole claim is acquired. "If the prohibition had remained in place, it would have impeded the active market in distressed debt where credi- tors often sell only part of their claims," Grundy says. By contrast, equity claimants don't have much to be happy about. Bad enough that the 2005 amendments subordinated certain equity claims to creditor claims in a restructuring and deprived them of voting rights, the latest revisions expand the definition of equity claims to include claims for dividends or similar payments, returns of capital, redemption or retrac- tion obligations, and monetary losses flowing from the owner- ship, purchase, or sale of an equity interest. The legislation has also been reworded to make it clear that CCAA or BIA proposal approv- als do not require a vote of equity claimants. As well, the procedures for disclaiming executory contracts have been modified. They now require the debtor to obtain the approval of the monitor, trustee, or the court before disclaiming. And, the debtor must provide an explanation of the reasons for the disclaimer if demanded by the counterparty. If the counterparty disputes the disclaimer, courts may approve it after considering a number of factors including whether the disclaimer will enhance the prospect of a via- ble outcome and whether the disclaimer is likely to cause significant financial hardship to the party. Certain contracts may not be disclaimed, including eli- gible financial contracts, real property leases, and financing agreements where the debtor is the borrower. On the intellectual proper- ty front, the revisions explic- itly protect licensees' rights to enforce exclusive licenses and to retain licenses for the term of any existing agreements. Finally, income trusts listed on prescribed stock exchanges are now permitted to commence proceedings under the BIA or the CCAA. FOCUS 'What happens is that the government pays the employees and then steps into the employees' shoes as a creditor, going forward,' says Kate McNeil. 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