On November 4, 2003, the standing Senate Committee on Banking, Trade and Commerce released its long-awaited report for reforms to the two key pieces of federal insolvency legislation. The result of many months of meetings with various stakeholders is a lengthy "State of the Union" report which includes more than 50 recommendations for legislative reform. This article reports on some of the more important recommendations for commercial insolvencies.

Key Commercial Insolvency Recommendations

1. Compensation Protection: The Committee recommends that unpaid claims for wages and vacation pay arising as a result of an employer’s bankruptcy be payable to an amount not to exceed the lesser of $2,000 or one pay period per employee. The funding of these claims should be assured by creating a super priority for those funds over the claims of secured creditors to inventory and accounts receivable. The decision to favour unpaid workers over the claims of secured creditors makes good political sense for obvious reasons with a Spring federal election likely.

2. Debtor-In-Possession Financing: Over the past several years a body of judicial decisions has developed relating to insolvent companies obtaining interim financing when dealing with the organizations under the CCAA or proposals under the BIA. This debtor in possession financing, whereby the financiers obtain a super priority claim over the claims of secured creditors, has been rather ad hoc and, at times, inconsistent when dealt with by various Courts across the country. The Committee recommends that both the BIA and the CCAA be amended to specifically permit debtor-in-possession of financing. The Court would then be granted clearer jurisdiction to order that the lien in favour of the debtor-in-possession financier can rank prior to such other existing security interests as the Court deems just.

3. Rights of Unpaid Suppliers: Section 81.1 of the BIA was designed to protect the rights of unpaid suppliers of goods to bankrupt companies. If, within 30 days of delivery of the goods, the purchaser was bankrupt or in receivership and the goods were and remained identifiable and were in the same state as they were upon delivery and not subject to an arms length resale, the supplier could demand return of the goods and not be subject to the general operation of the BIA. The purpose of the provision was to prevent insolvent companies from loading up on inventory in order to satisfy the claims of its secured creditors, which often included personal guarantees from the principals of the insolvent company. That said, it has become clear that the provision is so strict in timing and circumstance as to be of very little value to the unpaid suppliers. Accordingly, the Committee has recommended that the provision be repealed with the exception that protection of the rights of farmers, fishers and aquaculturalists as suppliers should be retained.

4. Due Diligence Defence for Directors: As currently drafted, the BIA does not include any generally applicable due diligence defence for directors of the bankrupt company. Accordingly, it is common for all of the directors of a company to resign either prior to or immediately upon the bankruptcy of the company. As a result, desirable individuals are not motivated to maintain or accept positions as directors of insolvent companies. The Committee has recommended that the BIA be amended to include a generally applicable due diligence defence against personal liability for directors of bankrupt companies.

5. Disclaimer of Executory Contract: In reorganizations under the CCAA and proposals under the BIA, often insolvent companies seek to disclaim commercial leases on the basis that the restructured entity cannot afford to continue in all of its existing commercial premises. For some time, there has been pressure to allow insolvent companies to disclaim all executory contracts (ie. contracts which have not been fully performed). The most controversial of these executory contracts would be a collective agreement entered into by the insolvent company with a trade union. After considering and attempting to balance the consequences of certain contracts being disclaimed with the prospect of a viable business operation being made non-viable due to the burdens of executory contracts, the Committee has recommended that both Federal Acts be amended to permit disclaimer of all executory contracts in existence at the date of insolvency. As is currently the case, the insolvent company should be obliged to convince the Court of inability or serious hardship in restructuring the enterprise without the disclaimer of the contract.

The proposed amendments described above are just a few of the many made by the Committee. None of the recommendations yet have the force of law and, with a Spring election in the offing, it is unlikely that any of the amendments will be made prior to 2005.

Should you have any questions or if you would like further information, please contact John Fiddick of the Clark Wilson Secured Lending Practice Group at 604.643.3159 or at jcf@cwilson.com.

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