A Q&A guide to restructuring and insolvency law in Canada.
The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.
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This Q&A is part of the PLC multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructurehandbook.
Canada is a federal jurisdiction. Security is a matter that comes within provincial jurisdiction. All Canadian provinces, except Québec, operate under common law principles. Québec is a civil law jurisdiction. Multiple security interests can be granted over the same property, subject to the priority rules concerning competing security interests over the same property (see Question 2).
Provincial law determines what exactly constitutes immovable property. Real estate is always immovable property, but fixtures that have been installed on real property may or may not be immovable property, depending on the relevant rules of provincial law.
Common forms of security. Security over immovable property can be granted by a:
Mortgage. This is often used where there is a single lender, and usually only involves a single piece of immovable property.
Debenture. A debenture is often used, instead of a mortgage, where there is a single lender, and can cover multiple properties, as well as movable property (see below, Movable property). It is more commonly used in commercial lending transactions where the property being charged is being used to support a business loan.
Trust deed. These are commonly seen in:
more sophisticated bond financings;
syndicated loan transactions where there may be several financiers involved.
The Personal Property Security Act (PPSA) may apply to fixtures which have become immovable property, if the security interest was created when the fixture was movable property. In that case, the various rules in the PPSA will apply (see below, Movable property: Common law jurisdictions).
Formalities. Mortgages over real property, debentures, and trust deeds must be:
In writing.
Registered on the title to the property that is subject to the charge (each province and territory maintains its own real property registration system).
Registration is considered notice of the interest. An interest in real property that is not registered can be cured even after a bankruptcy occurs provided it is registered before the immovable property in issue is sold by a trustee appointed to liquidate the bankrupt's assets.
Effects of non-compliance. If there isn't compliance then the security interest will be ineffective in bankruptcy and the creditor will share rateably with the other unsecured creditors.
Common forms of security. The normal type of security on immovable property is a hypothec. A hypothec is similar in function to a mortgage. A hypothec must be:
Created by deed.
Signed in the presence of a Québec notary.
Registered in the land title office for the jurisdiction in which the property is located.
Formalities. As with common law jurisdictions, registration is considered notice of the interest (see above, Common law jurisdictions).
Effects of non-compliance. Same as for common law jurisdictions (see above, Common law jurisdictions).
Movable property is dealt with differently in common law jurisdictions and in Québec.
Common forms of security. Security over movable property is granted pursuant to a security agreement, which can be either:
A general security agreement, under which the debtor grants the secured creditor a security interest over all the debtor's present and after-acquired personal property.
A chattel mortgage or equipment lease, under which security is granted over specific assets (for example, an equipment financier who will take security over the specific property financing).
In addition, security agreements can grant security over third party receivables owed to the debtor pursuant to receivable financing agreements.
All the common law jurisdictions have enacted a statute called the PPSA which applies to security interests in personal property regardless of the form. The PPSA replaced the older common law concepts such as pledge, reservation of title, floating charges, fixed charges and chattel mortgages. The PPSA is modelled on Article 9 of the Uniform Commercial Code. There are some variations between the different PPSAs, however, they are all equivalent in function. The PPSA generally does not cover immovable property (see above, Immovable property).
Formalities. A security interest in personal property must attach and be perfected for the interest to be enforceable against third parties. An interest in a secured asset that is perfected at the date a debtor goes into insolvency proceedings will be effective against all the other creditors of the debtor. An unregistered interest, except over certain specific types of secured asset that can be perfected by possession or control (see below), will not be effective and the creditor will rank as an unsecured creditor.
Attachment occurs where:
Value is given (that is, a debt or obligation for which the security is granted).
The debtor has acquired rights in the secured asset over which the security is being granted.
There is a written security agreement that the debtor has signed.
The security agreement provides a sufficiently clear description of the secured asset over which the security interest is created.
Perfection can occur in one of three ways:
Most commonly, registration in the PPSA electronic registration system that each jurisdiction maintains.
The secured party or its agent taking possession, in the case of the following assets:
chattel paper (that is, a written document that evidences both a monetary obligation and a security interest in or a lease of specific goods);
goods;
instruments (that is, bills of exchange, promissory notes, and letters of credit);
negotiable documents of title (that is, writing issued by or addressed to a bailee that covers the goods in the bailee's possession);
money.
Control, in the case of a security interest in investment property. Investment property includes a:
security, certificated or uncertificated;
security entitlement;
securities account;
futures contract;
futures account.
Effects of non-compliance. An interest that does not comply will be ineffective as against a trustee in bankruptcy and the creditor will rank with the other unsecured creditors for any recovery.
Common forms of security. As with immovable property, security over movable property is granted under a deed of hypothec (see above, Immovable property).
Formalities. The formalities for a deed of hypothec are different from immovable property:
A notary is not required for creation.
For perfection, either:
the interest is recorded electronically in the Register of Personal and Moveable Rights Registry (RPMRR);
the property subject to the security interest is delivered to the creditor or a third party agreed on between the debtor and the creditor to act in a custodial capacity.
Where the hypothec is in the form of a pledge then delivery of the pledged property is mandatory for the pledge to be effective.
The same rules that apply in common law jurisdictions apply to taking security in investment property (see above).
Effects of non-compliance. Same as for common law jurisdictions (see above, Common law jurisdictions).
Creditor claims rank ahead of shareholder claims in an insolvency. Generally, secured creditors rank ahead of preferred and unsecured creditors other than for certain claims that are given priority under statute. However, priorities may differ depending on the type of insolvency proceedings (see Question 6).
Creditor claims are generally paid in the following order:
Super-priority claims, such as:
payroll deductions that were not remitted (see Question 8, Directors' liability);
certain wage and pension claims of up to Can$2,000 (as at 1 March 2012, US$ was about Can$1);
realty property taxes;
qualified unpaid supplier claims;
court-ordered charges;
valid trust claims.
Secured claims.
Preferred unsecured claims, including:
administration costs;
landlord claims for up to three months' accelerated rent;
amounts that would have gone to the secured creditor but for the payment of wage and pension claims (see above);
certain workers' compensation claims.
General unsecured claims.
The simplest way for trade creditors to secure unpaid debts is to claim a purchase money security interest (PMSI). A PMSI can be created in one of the following situations:
A security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price.
A security interest taken in collateral, other than investment property, by a person who gives value for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the value is applied to acquire the rights.
The interest of a lessor of goods under a lease term that exceeds one year (including leases for less than a year with renewal options exceeding one year).
A PMSI ranks ahead of all other PPSA claims to the same collateral (for example a bank financier with security over all the debtor's assets) (see Question 1, Movable property).
Other mechanisms that a trade creditor can use include:
A general security agreement or a specific security agreement on the property being supplied. However, most trade creditors do not have the leverage to require their customers to grant security.
A cash deposit.
A letter of credit from a financial institution.
A personal guarantee from a principal of the debtor.
The shipping of consignment goods under a consignment agreement (consignment involves delivering goods to another, but retaining ownership until the goods are sold). A consignment agreement does not need to be registered under the PPSA if it is for a term of less than one year (including any renewal periods) (see Question 1, Movable property). In Ontario there is no need to register consignment agreements even if they are for a period longer than a year (this is one of the few areas where the Ontario PPSA differs from that in force in other Canadian jurisdictions). Goods on consignment never become property of the debtor and, therefore, in an insolvency the trade creditor can require the return of its property.
Unsecured creditors can bring legal proceedings to recover their debt. Judgments will be enforceable unless formal rescue or insolvency procedures are started (see Question 6). Once formal rescue or insolvency procedures are started, the creditor's claim will rank with other unsecured claims despite the judgment (see Question 2).
Trade creditors can simply stop supplying, or require cash on delivery before resuming supply.
Secured creditors can use the same remedies as unsecured creditors (see above, Unsecured creditors). In addition, they can seek to enforce their security against the collateral. A secured creditor must give ten days' notice of an intention to bring enforcement proceedings if that creditor intends to enforce against all or substantially all of the debtor's:
Inventory.
Accounts receivable.
Other property.
The debtor can waive the ten-day period but only after the notice of enforcement has been sent. The aim is to give the debtor the opportunity to consider if it should start formal rescue or other insolvency procedures. A secured creditor can seek to enforce by taking direct possession of the collateral itself, and:
Selling it and applying the proceeds to the debt.
Retaining it (this choice will be deemed to have satisfied the debt).
Most commonly, appointing a receiver (usually a licensed insolvency practitioner) to realise on the assets (see Question 6, Receivership).
Set-off of debts follows the occurrence of an insolvency event. It can take three forms:
Legal. Legal set-off arises where the debts are liquidated and mutual between the same parties and in the same capacity. For example, party A owes party B Can$1,000 for goods supplied and B owes A Can$500 for services rendered at the date B goes into insolvency proceedings. A can set off the Can$500 B owes it against the Can$1,000 it owes B, so that A must only pay Can$500 to satisfy B's claim.
Equitable. Equitable set-off arises where there is a relationship between the parties' claims such that it would be unconscionable or inequitable not to permit set-off to occur. In this context mutuality is not required. The creditor must have a cross-claim that is so closely connected with the debtor's claim that it would be unjust to enforce payment of the debtor's claim without taking into account the cross-claim.
Contractual. Contractual set-off arises where the parties have agreed that there will be certain claims set off where neither legal nor equitable set-off would otherwise apply.
There is no distinction drawn between creditors located inside and outside of Canada.
State support is not generally available for distressed businesses. However, government intervention has occurred on rare occasions where the matter was considered to be of public interest.
Objective. The purpose of proceedings under the Companies' Creditors Arrangement Act (CCAA) is to attempt to reach a compromise restructuring of the debtor's obligations to its creditors.
Initiation. The debtor or a creditor can apply to the court for the right to commence CCAA proceedings. There is no obligation to commence proceedings at any point.
At least two-thirds in value and a majority in number of each creditor class that votes on the proposal must approve the proposal. The court must then also approve the proposal. Usually this requires evidence that the creditors will be better off under the proposal than they would be if the debtor were liquidated in a bankruptcy.
Substantive tests. The debtor must:
Be insolvent, that is either the:
debtor is unable to meet its liabilities as they fall due (cash flow test);
debtor's assets are less than its liabilities (balance sheet test).
In addition, the debtor is considered insolvent if the debtor will, in the reasonably foreseeable future, face a cash shortage.
Together with any affiliated companies, have debts in excess of Can$5 million.
Supervision and control. The debtor remains in control of its assets. However, a monitor must be appointed to oversee and work with the debtor. The monitor must be someone who is licensed to act as a trustee (see below, Bankruptcy: Supervision and control). The monitor cannot have been the auditor of the debtor in the two-year period preceding the CCAA application. The monitor will report to the court if the debtor engages in any transactions out of the ordinary course of business or otherwise does not comply with any restrictions on its business that the court has imposed as part of the proceedings.
Protection from creditors. On the debtor being granted CCAA protection, the court will normally make an order prohibiting all creditors, secured and unsecured, from taking steps to pursue claims against the debtor. Any proceedings that had been initiated before the application will also be barred from continuing.
Length of procedure. There is no specific time limit. The debtor will receive 30 days' protection at the time of its initial filing (see above, Protection from creditors). After the initial 30-day period there is no limit on the length of any extension or on the number of extensions that the debtor may seek. It is rare, however, for a proceeding to go beyond about one year except in the more complicated restructurings (usually where there is significant overlap with operations in foreign jurisdictions).
Conclusion. Where the creditors and court approve the proposal the debtor emerges from the proceedings freed from any debts that have been dealt with in the proposal (subject to the debtor's obligations to make any payments under the proposal).
Once the proceedings have been concluded and the plan implemented, the debtor can resume its normal business.
Objective. The objective of a proposal under the Bankruptcy and Insolvency Act (BIA) is to attempt to reach a compromise restructuring of the debtor's obligations to its creditors.
Initiation. The debtor can initiate a proposal by filing a notice of intention to make a proposal under the BIA. The proceeding starts on the relevant documents being filed with the Official Receiver. At this stage there is no court involvement. There is no obligation to initiate proceedings. Creditors cannot start proposal proceedings.
To start a proposal proceeding, a corporate debtor must simply pass a resolution of its board of directors. The proposal must be approved by at least two-thirds in value and a majority in number of the unsecured creditors. The court must approve the proposal on the basis that the proposal is for the general benefit of the creditors. This normally requires that there is evidence that the unsecured creditors will be better off under the proposal than they would be if the debtor were liquidated in a bankruptcy. A proposal can also be made to one or more classes of secured creditors, in which case the same threshold approvals are needed in each class.
If unsecured creditors or the court refuse to approve the proposal the debtor is automatically bankrupt (see below, Bankruptcy). If a class of secured creditors refuses to approve a proposal than that class is free to realise its security but the debtor is not automatically bankrupt.
Substantive tests. The debtor must:
Be insolvent under either the cash flow test or balance sheet test (see above, CCAA proceedings: Substantive tests).
Have unsecured debts in excess of Can$1,000.
Supervision and control. The debtor remains in control of its assets. A trustee is appointed but has no power of control. The trustee's role is to:
Monitor the debtor.
Assist in dealing with the debtor's creditors and otherwise help in formulating the proposal.
Report to the court if there is any material adverse change during the course of the proposal.
Protection from creditors. All creditors, including secured creditors, are prohibited from continuing or initiating any proceedings against the debtor or its property. The only exception is for a secured creditor that served a notice of its intention to enforce security more than ten days before the debtor filed its notice of intention to make a proposal (see Question 4, Secured creditors).
Length of procedure. A proposal initially lasts for 30 days. The debtor can apply to the court for extensions. The court can grant extensions of up to 45 days, with a maximum of five additional months (for a total time limit of six months from the date the notice of intention to make a proposal is filed). If a proposal is not filed within the requisite time period the debtor is automatically bankrupt (see below, Bankruptcy).
Conclusion. The debtor continues to deal with its assets. If the creditors and court approve the proposal the debtor emerges from the proceedings freed from any debts that have been dealt with in the proposal (subject to the debtor's obligations to make any payments under the proposal).
The proceedings conclude when the debtor has fulfilled its obligations under the proposal. The trustee will issue a certificate of full performance of the proposal at which time the debtor is considered to have completed its restructuring and continues its normal business.
Objective. The objective of a bankruptcy under the BIA is to liquidate the debtor's assets and distribute them to the creditors in accordance with legal priorities.
Initiation. A bankruptcy can only be initiated where the debtor is insolvent (see below, Substantive tests). The debtor can initiate a bankruptcy by making an assignment under the BIA with the trustee that the debtor has selected. The relevant documents must be filed with the Official Receiver. At this stage there is no court involvement. There is no mandatory requirement to initiate proceedings.
To start a bankruptcy, a corporate debtor must simply pass a resolution of its board of directors.
Substantive tests. The debtor must be insolvent and have unsecured debts in excess of Can$1,000 (see above, BIA proposal: Substantive tests).
Supervision and control. The debtor's assets vest in a bankruptcy trustee. The trustee is licensed and supervised by the Superintendent of Bankruptcy, which is an independent government agency responsible for the overall supervision and integrity of the bankruptcy system. The trustee, subject to the rights of secured creditors, assumes full control over all the debtor's assets and replaces the management in a bankruptcy. Secured creditors can realise their security although they must act in a commercially reasonable manner.
Protection from creditors. All the bankrupt's assets vest in the bankruptcy trustee and all proceedings against the bankrupt and its property are stopped other than proceedings from a secured creditor that seeks to realise its security (see Question 4, Secured creditors). The trustee can require the secured creditor that seeks to enforce its security to stop for a period to value the security. The trustee can elect to redeem the security for its value; otherwise, the trustee must allow the secured creditor to resume enforcement.
Length of procedure. There is no specific timeline for a bankruptcy.
Conclusion. The debtor's assets (after secured creditors have realised their security and after the payment of super-priority creditors (see Question 2)) are distributed on a pro rata basis among the unsecured creditors. The bankrupt ceases to have the legal capacity to deal with its assets and that power now belongs to the trustee.
Bankruptcy concludes with the trustee having distributed all the assets to the creditors. The trustee is then discharged. The company will eventually be dissolved for failing to file appropriate returns.
The debtor plays the most significant role in the outcome of any restructuring. However, the following may also play significant roles:
Any significant secured creditor (or group of secured creditors).
The relevant insolvency professional (see Question 6).
Any critical suppliers to the debtor (including employees).
Generally, a director, corporate parent, or any other party will not be held liable for an insolvent company's debts. However, this is subject to a number of important exceptions.
Certain statutes impose personal liability on directors:
Every province and territory (the provinces and territories generally have jurisdiction over labour relations) and the federal government concerning federally regulated industries (for example, banking and aeronautics), imposes personal liability on directors for:
unpaid wages;
accrued vacation pay; and
in some cases, termination and severance pay.
Directors are personally liable for payroll remittances for amounts deducted from employees pay on account of:
income taxes;
Canada Pension Plan (or Québec Pension Plan in that province) contributions; and
employment insurance premiums.
These amounts are deducted from the pay cheques of the company's employees. They are considered to be similar to trust funds, and the directors are in effect personally liable for this breach of trust. However, the directors have a defence if they can show that:
they were duly diligent;
the failure to remit these amounts in a timely manner was completely beyond their control.
Directors are personally liable where a company defaults in payment of its goods and services tax or harmonised sales tax (HST) obligations. Those provinces which still retain a separate retail sales tax (instead of HST) also impose personal liability on directors for failure to remit the provincial sales tax.
Directors are personally liable for failure to remit certain pension contributions, particularly for those amounts which were deducted from the employees' pay.
Other than those specific statutory liabilities, a director could bear personal liability if acting improperly so as to cause loss to the company's creditors. Finally, there is the possibility of contractual liability, such as where the senior secured creditor required personal guarantees from the company's directors or officers as a condition of advancing credit.
Absent a contractual commitment, a parent company is not liable for the debts of an insolvent subsidiary, with the potential exception of certain employee claims. At common law it is possible for a court to determine that the employees of the subsidiary were also employees of the parent company and the parent is jointly liable for the debts to the employees. However, this issue only arises where the parent, in effect, exercised common control over the subsidiary. In addition to the common law, employment legislation in most provinces and territories allows liability to be imposed on a related company in certain circumstances.
Under tax laws it is also possible for the parent to become liable for the subsidiary's tax liabilities where the parent received assets from the subsidiary for less than the fair market value of the assets.
Pre-insolvency transactions can be set aside under the BIA where the transaction constitutes a preference or is at an undervalue:
Preference. A preference is a transaction which has the effect of preferring the creditor who received the payment or property before bankruptcy, and which was made within:
three months of the bankruptcy if the debtor was not related to the creditor;
12 months of the bankruptcy if the parties were related.
Unless the preference can be rebutted the transaction is void and will be set aside, which will result in the payment or the property being returned to the bankrupt's estate to be distributed in accordance with the legal priorities (see Question 2).
Transaction at an undervalue. This occurs where:
the debtor was insolvent at the time of the transaction or became insolvent as a result of the transaction;
the debtor entered into the transaction with the intent to defeat, delay or defraud creditors; and
the transaction occurred within one year of the bankruptcy proceedings' having started.
If the transaction was for little or no consideration than the court can either:
set aside the transaction and thereby order the property to be returned;
order the recipient to pay the difference between what it did pay and the fair market value of the property.
If the debtor and the recipient were related then the review period is extended for up to five years before the start of bankruptcy proceedings.
A trustee, or a creditor personally where the trustee refuses to act, can initiate proceedings to challenge a transaction as a preference or as one that occurred at an undervalue.
Provincial law also provides for setting aside preferences and transactions to defeat, delay or defraud creditors. These laws will be used where the BIA time periods have passed and can also result in the relevant transaction being set aside.
The company can carry on its business, according to certain conditions, in CCAA proceedings and BIA proposals (see Question 6).
The company continues under its own authority. However, there is a monitor (in a CCAA) or a trustee (in a BIA proposal) appointed to oversee the operations but without decision making authority (see Question 6).
A debtor company that initiates a CCAA or BIA proposal proceeding cannot deprive a licensee's right to use intellectual property that the debtor licensed, including any extension periods granted as of right, so long as the licensee continues to perform its obligations under the licence agreement. Also, a debtor company cannot lose its ability to use intellectual property licensed to it by reason only of royalties that the company owes to the licensor for the period preceding the filing.
Debtor-in-possession (DIP) financing is available in both CCAA proceedings and BIA proposals (see Question 6). The court can only make such an order on notice to any secured creditor likely to be affected if a priority charge is to be granted on the debtor's assets to secure the DIP financing. Typically, DIP financing will be secured on the debtor's assets ahead of existing secured claims and will only be subject to other court-ordered charges granted in the proceedings.
Canadian courts are very liberal in recognising foreign insolvency proceedings. Both the CCAA and the BIA explicitly provide for recognition of and co-ordination with foreign proceedings.
There is a strong emphasis on co-operating with concurrent proceedings. Where appropriate, joint hearings will be held with the foreign court (often via videolink). Comity is actively encouraged.
The recognition provisions of the BIA and the CCAA are largely modelled on the UNCITRAL Model Law on Cross-Border Insolvency 1997.
There are no special procedures that foreign creditors must comply with to submit claims.
Both the CCAA and the BIA were substantially revised in September 2009. There is an ongoing review process but specific reform proposals have yet to be proposed.
T +1 416 643 6822
F +1 416 360 8425
E kkraft@heenan.ca
W www.heenanblaikie.com
Qualified. Canada (Ontario), 1991
Areas of practice. Insolvency; banking and finance.
Recent transactions
Representing Chubb Insurance Company in the Nortel and Timminco CCAA proceedings.
Representing BDO Canada Limited in the receiverships of Premium Products and Siljon Investments.
Representing Elephant & Castle Group as Canadian counsel in this cross-border (US/Canada) insolvency proceeding.
Representing Tembec Industries in the bankruptcy of Marathon Pulp.
Representing CBS in the Canwest Media CCAA proceedings.
Representing Deloitte & Touche in its capacity as receiver of Anvil Range Mining Corporation and as trustee in bankruptcy of Constellation Copper Corporation.
Representing K2 in the restructuring of Newport Income Fund's indebtedness.
Representing Federal Insurance Company in the Pope & Talbot insolvency proceedings.
Representing Shell Canada in the SemCAMS & Hard Rock Paving insolvency proceedings.
