Bill C-12: Clause by Clause Analysis — Clauses 1-10

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


Amendments to the Bankruptcy and Insolvency Act
Amendments to the Bankruptcy and Insolvency Act (BIA) Clauses of Bill C-12 Sections
Definitions 1 s.2
Related Parties 2 s.4(5)
Compilation of Information 3 s.11.1(3)
Application 4 s.13.3(1.1)
Trustee May Act for Secured Creditor 5 s.13.4(1)
Decision Affecting a Trustee's Licence 6 s.14.01
Summons 7 s.14.02(1.1) and (1.2)
Disciplinary Hearings 8 s.14.03(2)(b)
Trustees' Liability 9 s.14.06
Asset Sales 10 s.30(5) and (6)

Bill Clause No. 1
Section No. BIA s.2
Topic: Definitions

Proposed Wording

"corporation" means a company or legal person that is incorporated by or under an Act of Parliament or of the legislature of a province, an incorporated company, wherever incorporated, that is authorized to carry on business in Canada or has an office or property in Canada or an income trust, but does not include banks, authorized foreign banks within the meaning of section 2 of the Bank Act, insurance companies, trust companies, loan companies or railway companies;

"court", except in paragraphs 178(1)(a) and (a.1) and sections 204.1 to 204.3, means a court referred to in subsection 183(1) or (1.1) or a judge of that court, and includes a registrar when exercising the powers of the court conferred on a registrar under this Act;

"current assets" means cash, cash equivalents — including negotiable instruments and demand deposits — inventory or accounts receivable, or the proceeds from any dealing with those assets;

["date of the bankruptcy", in respect of a person, means the date of] …

(b) the filing of an assignment in respect of the person, or

"date of the initial bankruptcy event", in respect of a person, means the earliest of the day on which any one of the following is made, filed or commenced, as the case may be:...........

(f) proceedings under the Companies' Creditors Arrangement Act;

"director", in respect of a corporation other than an income trust, means a person occupying the position of director by whatever name called and, in the case of an income trust, a person occupying the position of trustee by whatever named called;

"equity claim" means a claim that is in respect of an equity interest, including a claim for, among others,

  • (a) a dividend or similar payment,
  • (b) a return of capital,
  • (c) a redemption or retraction obligation,
  • (d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or
  • (e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d);

"equity interest" means

  • (a) in the case of a corporation other than an income trust, a share in the corporation — or a warrant or option or another right to acquire a share in the corporation — other than one that is derived from a convertible debt, and
  • (b) in the case of an income trust, a unit in the income trust — or a warrant or option or another right to acquire a unit in the income trust — other than one that is derived from a convertible debt;

"income trust" means a trust that has assets in Canada if

  • (a) its units are listed on a prescribed stock exchange on the date of the initial bankruptcy event, or
  • (b) the majority of its units are held by a trust whose units are listed on a prescribed stock exchange on the date of the initial bankruptcy event;

"person" includes a partnership, an unincorporated association, a corporation, a cooperative society or a cooperative organization, the successors of a partnership, of an association, of a corporation, of a society or of an organization and the heirs, executors, liquidators of the succession, administrators or other legal representatives of a person;

"shareholder" includes a member of a corporation — and, in the case of an income trust, a holder of a unit in an income trust — to which this Act applies;

"transfer at undervalue" means a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor;

Rationale

The definition of "corporation" is amended by adding an "income trust" as an entity that would be captured by the definition. The intention of the reform is to ensure more consistent treatment of companies and income trusts.

The definition of "court" is amended to replace the conjunction "and" with "or". As a result of a drafting error in Chapter 47, the definition of court was meaningless because it required that a body be listed in both subsection 184(1) and (1.1) but the lists in those subsections are mutually exclusive. The original intention was to include a body listed in either subsection. The conjunction "or" is correct.

The definition of "current assets" is clarified to provide better certainty for stakeholders, practitioners and courts. Chapter 47 introduced a definition based on accounting concepts, which are, by their nature, flexible but also ambiguous. The amendment addresses concerns that the definition could result in excessive litigation. The amended definition provides better clarity by referring to easily identifiable items — cash, inventory and accounts receivable.

The definition of "date of the bankruptcy" is amended for grammatical purposes only.

The definition of "date of the initial bankruptcy event" is amended to include the commencement of proceedings under the Companies' Creditors Arrangement Act (CCAA). The amendment addresses concerns that strategic bankrupts may choose to proceed under the CCAA with the sole intention of defeating creditors' ability to challenge preferences and transfers at undervalue under a subsequent bankruptcy. It does so by preventing strategic bankrupts from commencing and maintaining proceedings under the CCAA until the time periods set out in the BIA for preferences and transfers at undervalue have lapsed and then filing in bankruptcy. In such an event, the amended definition will allow creditors to challenge transactions that occurred prior to the CCAA proceeding and not only the bankruptcy.

The definition of "director" is replaced by a definition substantially similar to that used in the Canada Business Corporations Act (CBCA). The intention is to ensure greater consistency within Canada's framework legislation. An addition is made to the definition to reflect the fact that the BIA applies to income trusts, while the CBCA does not.

The definition of "equity claim" is added to provide greater clarity in subsequent provisions that deal with the rights of shareholders. An equity claim is defined to include any claim that is related to an equity interest.

The definition of "equity interest" is added to provide greater clarity in subsequent provisions that deal with the rights of shareholders. An equity interest is defined to include shares in corporations and units in income trusts and the right to acquire those except where the right is derived from a debt that is convertible into a share or unit. For example, a debenture witnessing a debt obligation that may, at the option of the holder, be converted into equity, should not be considered an equity interest — unless the holder has taken the steps necessary to have the conversion occur.

The definition of "income trust" is amended to clarify that a trust only had to be listed on the day before an insolvency proceeding commenced. The amendment is intended to address concerns that an income trust that would otherwise be entitled to use the Act would be prevented from doing so if its units are subject to a cease trade order or if it is delisted, both of which may occur due to financial difficulties. In addition, a second amendment is made to clarify that operating trusts may initiate a proceeding under the Act without its holding trust being subject to the proceeding. This amendment relates to the structure of income trusts, which often includes a listed holding trust holding the units of an operating trust.

The definition of "person" is amended by removing "income trust" as an entity that would be captured by the definition. "Income trusts" are included under the definition of "corporation". In addition, the English version is amended to correct a divergence from the French version by adding the word "cooperative" before "organization", as was the intended meaning.

The definition of "shareholder" is added to provide greater clarity in subsequent provisions that deal with the rights of shareholders. The definition is made inclusive and explicitly adds holders of units of income trusts. The reference to "shareholder" was removed because it was circular and redundant. Making the definition inclusive, however, clarifies that the removal of "shareholder" is not intended to be interpreted as to exclude a holder of shares.

The definition of "transfer at undervalue" is simplified by clarifying that any transaction where the debtor receives conspicuously less value than he or she gives is captured.

Present Law

Bankruptcy and Insolvency Act:

"corporation" includes any company or legal person incorporated by or under an Act of Parliament or of any province, and any incorporated company, wherever incorporated, that is authorized to carry on business in Canada or that has an office or property in Canada, but does not include banks, authorized foreign banks within the meaning of section 2 of the Bank Act, insurance companies, trust companies, loan companies or railway companies;

"date of the initial bankruptcy event", in respect of a person, means the earliest of the date of filing of or making of

  • (a) an assignment by or in respect of the person,
  • (b) a proposal by or in respect of the person,
  • (c) a notice of intention by the person,
  • (d) the first application for a bankruptcy order against the person, in any case
    • (i) referred to in paragraph 50.4(8)(a) or 57(a) or subsection 61(2), or
    • (ii) in which a notice of intention to make a proposal has been filed under section 50.4 or a proposal has been filed under section 62 in respect of the person and the person files an assignment before the court has approved the proposal, or
  • (e) the application in respect of which a bankruptcy order is made, in the case of an application other than one referred to in paragraph (d);

As enacted by Chapter 47, Clause 2:

"court", except in paragraphs 178(1)(a) and (a.1) and sections 204.1 to 204.3, means a court referred to in subsections 183(1) and (1.1) or a judge of that court, and includes a registrar when exercising the powers of the court conferred on a registrar under this Act;

"current assets" means unrestricted cash, or any other asset that, in the normal course of operations, is expected to be converted into cash or consumed in the production of income within one year or within the normal operating cycle when it is longer than a year;

"date of the bankruptcy"

(b) the filing or making of an assignment by or in respect of the person, or

"director" includes any individual, however designated, acting in any capacity that is similar to that of a director of a corporation;

"income trust" means a trust

  • (a) that has assets in Canada, and
  • (b) the units of which are traded on a prescribed stock exchange;

"person" includes a partnership, an unincorporated association, a corporation, a cooperative society, an organization or an income trust, the successors of a partnership, of an association, of a corporation, of a society, of an organization or of an income trust, and the heirs, executors, liquidators of the succession, administrators or other legal representative of a person;

"transfer at undervalue" means a transaction in which the consideration received by a person is conspicuously less than the fair market value of the property or services sold or disposed of by the person in the transaction;


Bill Clause No. 2
Section No. BIA s.4(5)
Topic: Related Parties

Proposed Wording

4.(5) Persons who are related to each other are deemed not to deal with each other at arm's length while so related. For the purpose of paragraph 95(1)(b) or 96(1)(b), the persons are, in the absence of evidence to the contrary, deemed not to deal with each other at arm's length.

Rationale

Subsection 4(5) is amended to provide an opportunity for a related party to rebut, in a proceeding under the preferences or transfer at undervalue sections, the presumption that they are not acting at arm's length to the debtor.

The preferences and transfer at undervalue sections provide strict rules regarding parties not acting at arm's length. Currently, these rules apply to parties simply because they are related even if they are otherwise acting independently. The amendment will ensure that related but independent parties are not subject to the strict rules.

Present Law

As enacted by Chapter 47, Clause 5(4):

4.(5) Persons related to each other are deemed not to deal with each other at arm's length while so related.


Bill Clause No. 3
Section No. BIA s.11.1(3)
Topic: Compilation of Information

Proposed Wording

11.1(3) The Superintendent may enter into an agreement to provide a compilation of all or part of the information that is contained in the public record.

Rationale

The amendment clarifies that the Superintendent of Bankruptcy has the authority to enter into agreements to provide compilations of information maintained in the public record to third parties.

Present Law

None.


Bill Clause No. 4
Section No. BIA s.13.3(1.1)
Topic: Application

Proposed Wording

13.3(1.1) S'il demande l'autorisation visée au paragraphe (1), le syndic envoie sans délai une copie de sa demande au surintendant.

Rationale

An amendment is made to the French version to correct an English/French divergence created by Chapter 47.

Present Law

As enacted by Chapter 47, Clause 11:

13.3(1.1) S'il demande l'autorisation du tribunal visée au paragraphe (1), le syndic en donne avis sans délai au surintendant.


Bill Clause No. 5
Section No. BIA s.13.4(1)
Topic: Trustee May Act for Secured Creditor

Proposed Wording

13.4(1) No trustee may, while acting as the trustee of an estate, act for or assist a secured creditor to assert a claim against the estate or to realize or otherwise deal with a security that the secured creditor holds, unless the trustee has obtained a written opinion from independent legal counsel that the security is valid and enforceable against the estate.

Rationale

Section 13.4(1) is designed to address the potential conflict of interest inherent in allowing a trustee, who is charged with administering the bankruptcy estate for the benefit of all creditors, to simultaneously act on behalf of a secured creditor in realizing on its security. The reason for allowing the potential conflict to exist is that it is more cost effective for the estate to have the trustee acting in the dual role rather than requiring two separate professionals (a trustee on behalf of the creditors generally and a receiver on behalf of the secured creditor) to be involved. To address the potential conflict of interest, the legislation requires the trustee to obtain a legal opinion that the security is valid and enforceable. The section was amended by Chapter 47 with the intention of clarifying that trustees should receive impartial opinions relating to the security.

The proposed amendment is intended to address concerns that Chapter 47 would unduly restrict the number of lawyers who would be in a position to provide the necessary opinion regarding the validity of the security. The section has therefore been amended to provide that in order for the trustee to act for a secured creditor, the trustee must have obtained a written opinion from "independent" legal counsel that the security is valid and enforceable against the estate.

Present Law

As enacted by Chapter 47, Clause 12:

13.4(1) No trustee shall, while acting as the trustee of an estate, act for or assist a secured creditor of the estate to assert any claim against the estate or to realize or otherwise deal with the security that the secured creditor holds, unless the trustee has obtained a written opinion of legal counsel who has not acted for the secured creditor in the previous two years and is not related to the trustee that the security is valid and enforceable as against the estate.


Bill Clause No. 6
Section No. BIA s.14.01
Topic: Decision Affecting a Trustee's Licence

Proposed Wording

14.01(1) If, after making or causing to be made an inquiry or investigation into the conduct of a trustee, it appears to the Superintendent that

Rationale

The Superintendent of Bankruptcy is empowered to conduct inquiries or investigations into the conduct of trustees pursuant to section 10 of the BIA. The amendment is intended to clarify that the powers of the Superintendent under section 14.01 may be exercised after either an inquiry or an investigation. It also corrects a divergence from the French version, which includes the concept of "inquiry."

Present Law

Bankruptcy and Insolvency Act:

14.01(1) Where, after making or causing to be made an investigation into the conduct of a trustee, it appears to the Superintendent that


Bill Clause No. 7
Section No. BIA s.14.02(1.1) and (1.2)
Topic: Summons

Proposed Wording

14.02(1.1) The Superintendent may, for the purpose of the hearing, issue a summons requiring and commanding any person named in it

  • (a) to appear at the time and place mentioned in it;
  • (b) to testify to all matters within their knowledge relative to the subject matter of the inquiry or investigation into the conduct of the trustee; and
  • (c) to bring and produce any books, records, data, documents or papers — including those in electronic form — in their possession or under their control relative to the subject matter of the inquiry or investigation.

(1.2) A person may be summoned from any part of Canada by virtue of a summons issued under subsection (1.1).

Rationale

The section sets the terms for when and how the Superintendent of Bankruptcy may summon a person for the purpose of a hearing relating to the conduct of a trustee. The amendments are intended to modernize the language and clarify when the Superintendent may invoke the provisions.

The Superintendent of Bankruptcy is empowered to conduct inquiries or investigations into the conduct of trustees pursuant to section 10 of the BIA. The amendment is intended to clarify that the powers of the Superintendent under subsection (1.1) may be exercised in respect of either an inquiry or an investigation. It also corrects a divergence from the French version, which includes the concept of "inquiry." In addition, the subsection is amended to correct a divergence between the French term (assignations) and the English terms (subpoena, other request or summons) by modernizing the English version to limit the English version to "summons."

Paragraph (c) is amended to correct a drafting error created by Chapter 47, which could be interpreted to mean that only electronic "data" were to be subject to a production order, while electronic books, records and papers were not. The amendment clarifies the policy intention to include all materials under a production order, including those in electronic form.

Subsection (1.2) is amended to correct a divergence between the French term (assignations) and the English terms (subpoena, other request or summons) by modernizing the English version to limit the English version to "summons".

Present Law

As enacted by Chapter 47, Clause 15:

14.02(1.1) The Superintendent may, for the purpose of the hearing, issue a subpoena or other request or summons, requiring and commanding any person named in it

  • (a) to appear at the time and place mentioned in it;
  • (b) to testify to all matters within his or her knowledge relative to the subject matter of the investigation into the conduct of the trustee; and
  • (c) to bring and produce any books, records, data, including data in electronic form, documents or papers in the person's possession or under the person's control relative to the subject matter of the investigation.

(1.2) A person may be summoned from any part of Canada by virtue of a subpoena, request or summons issued under subsection (1.1).


Bill Clause No. 8
Section No. BIA s.14.03(2)(b)
Topic: Disciplinary Hearings

Proposed Wording

14.03(2)(b) la tenue des investigations ou des enquêtes prévues à l'alinéa 5(3)(e);

Rationale

The Superintendent has the authority to delegate the power to conduct an inquiry or investigation. The amendment corrects a divergence in the French version created by a drafting error in Chapter 47 which stated that the inquiry or investigation must be conducted by the Superintendent.

Present Law

As enacted by Chapter 47, Clause 16:

14.03(2)(b) la tenue par lui de l'investigation ou de l'enquête prévues à l'alinéa 5(3)(e);


Bill Clause No. 9
Section No. BIA s.14.06
Topic: Trustees' Liability

Proposed Wording

14.06(1.2) Despite anything in federal or provincial law, if a trustee, in that position, carries on the business of a debtor or continues the employment of a debtor's employees, the trustee is not by reason of that fact personally liable in respect of a liability, including one as a successor employer,

  • (a) that is in respect of the employees or former employees of the debtor or a predecessor of the debtor or in respect of a pension plan for the benefit of those employees; and
  • (b) that exists before the trustee is appointed or that is calculated by reference to a period before the appointment.

(1.3) A liability referred to in subsection (1.2) is not to rank as costs of administration.

(1.4) Subsection (1.2) does not affect the liability of a successor employer other than the trustee.

French version only:

14.06(1.1)(c) les autres personnes qui sont nommément habilitées à prendre - ou ont pris légalement - la possession ou la responsabilité d'un bien acquis ou utilisé par une personne insolvable ou un failli dans le cadre de ses affaires.

Rationale

Insolvency professionals (i.e. trustees, receivers, or interim receivers) may carry on the business of a bankrupt or insolvent person with the intention of maximizing the value of the business for the benefit of the creditors. Because going concern values generally exceed the value of a non-operating business, it is usually in the interest of the creditors as a whole, as well as the employees and the community, that a viable but financially troubled business continue to operate under the direction of a professional while a purchaser of the business is sought.

To ensure the benefits of having a business continue to operate during a restructuring, the BIA provided statutory protection for insolvency professionals against liabilities of the debtor. Judicial interpretation of the protection, however, has kept the door open for arguments to be made that the professional be held personally responsible for liabilities of the debtor, thereby increasing litigation and slowing the restructuring process, all of which increase the costs of the process to the detriment of the creditors. Further, if the arguments are successful, liability for amounts related to severance and termination pay, unremitted pension contributions or unfunded pension liabilities could become the personal responsibility of the professional. Aside from the inequity in holding a professional responsible for the debts of others, this risk of personal liability may result in professionals refusing to carry on the business, resulting in more liquidations, smaller recoveries by creditors and higher job losses.

Amendments in Chapter 47 attempted to address the concerns of professionals in a manner that would provide them with sufficient protection. The amendments, however, proved insufficient to give them the comfort necessary to act in cases where significant personal liabilities are possible.

As such, section 14.06 is being clarified to provide even greater certainty. Specifically, subsection (1.2) is amended to clarify that the professional is not liable for a claim that relates to a liability that existed, or that is calculated by reference to a period, before their appointment even if the liability has not crystallized on the appointment.

Subsection (1.3) is amended to change 'claim' to 'liability' to be consistent with the amendments to (1.2).

The addition of subsection (1.4) is intended to clarify that the liabilities are not extinguished but rather, are passed to the eventual purchaser of the business, if any.

Also, the French version of the Act is amended at subsection (1.1)(c) to correct a divergence from the English version. Specifically, a person who takes possession of property must do so legally. Chapter 47 did not include that concept, which was an omission in drafting.

Present Law

As enacted by Chapter 47, Clause 17:

14.06 (1.2) Despite anything in any federal or provincial law, if a trustee carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount if the claim is in relation to a debt or liability, present or future, to which the debtor is subject on the day on which the trustee is appointed.

Bankruptcy and Insolvency Act:

(1.3) A claim referred to in subsection (1.2) shall not rank as costs of administration.

French Version only: As enacted by Chapter 47, Clause 17:

14.06(1.1)(c) les autres personnes qui sont habilitées nommément, conformément à la loi, à prendre - ou ont pris - la possession ou la responsabilité de tout bien d'une personne insolvable ou d'un failli acquis ou utilisé dans le cadre de ses affaires.


Bill Clause No. 10
Section No. BIA s.30(5) and (6)
Topic: Asset Sales

Proposed Wording

30.(5) For the purpose of subsection (4), in the case of a bankrupt other than an individual, a person who is related to the bankrupt includes

  • (a) a director or officer of the bankrupt;
  • (b) a person who has or has had, directly or indirectly, control in fact of the bankrupt; and
  • (c) a person who is related to a person described in paragraph (a) or (b).

(6) In deciding whether to grant the authorization, the court is to consider, among other things,

  • (a) whether the process leading to the proposed sale or disposition of the property was reasonable in the circumstances;
  • (b) the extent to which the creditors were consulted;
  • (c) the effects of the proposed sale or disposition on creditors and other interested parties;
  • (d) whether the consideration to be received for the property is reasonable and fair, taking into account the market value of the property;
  • (e) whether good faith efforts were made to sell or otherwise dispose of the property to persons who are not related to the bankrupt; and
  • (f) whether the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition of the property.

Rationale

Section 30 sets out the powers exercisable by the trustee in a bankruptcy. Chapter 47 amended section 30 to require the trustee to obtain court approval in order to sell property of the bankrupt to a person related to the bankrupt.

Due to drafting errors in Chapter 47, the explanation of related parties was incomplete. Subsection (5) is amended to correct the explanation of who is a person related to a bankrupt by including those individuals that have or had direct or indirect control of the bankrupt and by clarifying that it includes persons related to those described in paragraphs (a) and (b).

Paragraph 6(f) is amended to address concerns that the offer that the court consider must be a legitimate offer. As such, the court is directed to judge the offer only against the consideration that would be received by other offers made in accordance with the bidding process, and not against offers never formalized.

Present Law

As enacted by Chapter 47, Clause 23:

30.(5) For the purpose of subsection (4), in the case of a bankrupt other than an individual, a person who is related to the bankrupt includes a person who controls the bankrupt, a director or an officer of the bankrupt and a person who is related to a director or an officer of the bankrupt.

(6) In deciding whether to grant the authorization, the court must consider, among other things,

  • (a) whether the process leading to the proposed sale or disposal of the property was reasonable in the circumstances;
  • (b) the extent to which the creditors were consulted in respect of the proposed sale or disposal;
  • (c) the effects of the proposed sale or disposal on creditors and other interested parties;
  • (d) whether the consideration to be received for the property is reasonable and fair, taking into account the market value of the property;
  • (e) whether good faith efforts were made to sell or dispose of the property to persons who are not related to the bankrupt; and
  • (f) whether the consideration to be received is superior to the consideration that would be received under all other offers actually received in respect of the property.