Bill C-12: Clause by Clause Analysis — Clauses 11-20

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
Duty of Former Trustee 11 s.36
Inquiry or Investigation 12 s.41(8.1)
Place of Appointment of an Interim Receiver 13 s.46(3)
Interim Receivers 14 s.47
Interim Receivers 15 s.47.1
Proposals 16 s.50
Notice of Intention 17 s.50.4
Interim Financing 18 s.50.6
Voting Rights 19 s.54(2)
Voting by Equity Claimants 20 s.54.1

Bill Clause No. 11
Section No. BIA s.36
Topic: Duty of Former Trustee

Proposed Wording

36.(1) À la nomination d'un syndic substitué, le syndic qui l'a précédé soumet immédiatement ses comptes au tribunal et remet au syndic substitué tous les biens de l'actif, avec tous les livres, registres et documents du failli et ceux qui sont relatifs à l'administration de l'actif. Il lui remet également un état complet des recettes provenant des biens du failli ou d'autres sources, intérêts y compris, et de ses débours et dépenses, ainsi que de la rémunération qu'il réclame. L'état est accompagné d'un document contenant la description détaillée de tous les biens du failli qui n'ont pas été vendus ou réalisés, où sont indiqués, en plus de leur valeur, le motif pour lequel ils ne l'ont pas été, ainsi que la façon dont il en a été disposé.

Rationale

The French version of the Act is amended to correct a divergence from the English version by clarifying that the books, records and documents of the bankrupt and of the administration of the estate must be delivered to the substituted trustee.

Present Law

As enacted by Chapter 47, Clause 28:

36.(1) À la nomination d'un syndic substitué, le syndic qui l'a précédé soumet immédiatement ses comptes au tribunal et remet au syndic substitué tous les biens de l'actif, avec tous les livres, registres et documents du failli et de l'administration. Il lui remet également un état des recettes et des débours contenant un relevé complet de toutes les sommes qu'il a reçues sur les biens du failli ou autrement, le montant des intérêts qu'il a reçus, les sommes qu'il a déboursées et les dépenses qu'il a subies et la rémunération qu'il réclame, ainsi que tous les détails, la description et la valeur de la totalité des biens du failli qui n'ont pas été vendus ou réalisés, en indiquant le motif pour lequel ces biens n'ont pas été vendus ou réalisés, ainsi que la façon dont il en a été disposé.


Bill Clause No. 12
Section No. BIA s.41(8.1)
Topic: Inquiry or Investigation

Proposed Wording

41.(8.1) Nothing in subsection (8) is to be construed as preventing an inquiry, investigation or proceeding in respect of a trustee under subsection 14.01(1).

Rationale

The Superintendent of Bankruptcy is empowered, pursuant to section 10, to conduct inquiries or investigations. The subsection is amended to clarify that subsection (8) does not prevent an inquiry, in addition to an investigation or proceeding.

Present Law

Bankruptcy and Insolvency Act:

41.(8.1) Nothing in subsection (8) shall be construed to prevent an investigation or a proceeding in respect of a trustee under subsection 14.01(1).


Bill Clause No. 13
Section No. BIA s.46(3)
Topic: Place of Appointment of an Interim Receiver

Proposed Wording

46.(3) An application under subsection (1) is to be filed in a court having jurisdiction in the judicial district of the locality of the debtor.

Rationale

Interim receivers are appointed by a court under this section to safeguard the assets of a debtor where the court is satisfied that it is necessary for the protection of the interests of the creditors.

Subsection (3) is added to clarify that an application for the appointment of a receiver be made in the locality of the debtor. The existing legislation is silent on where the application may be made. Accordingly, the application is often brought in a location that is more convenient for the creditor who is making the application, which may not have any connection with the place in which the debtor's business is located or where other creditors are located. This can have the effect of preventing smaller creditors from participating in the process because of the prohibitive cost of hiring legal counsel in a distant jurisdiction.

Present Law

None.


Bill Clause No. 14
Section No. BIA s.47
Topic: Interim Receivers

Proposed Wording

47.(1) If the court is satisfied that a notice is about to be sent or was sent under subsection 244(1), it may, subject to subsection (3), appoint a trustee as interim receiver of all or any part of the debtor's property that is subject to the security to which the notice relates until the earliest of

  • (a) the taking of possession by a receiver, within the meaning of subsection 243(2), of the debtor's property over which the interim receiver was appointed,
  • (b) the taking of possession by a trustee of the debtor's property over which the interim receiver was appointed, and
  • (c) the expiry of 30 days after the day on which the interim receiver was appointed or of any period specified by the court.

(2) […]

  • (c) take conservatory measures; and
  • (d) summarily dispose of property that is perishable or likely to depreciate rapidly in value.

(4) An application under subsection (1) is to be filed in a court having jurisdiction in the judicial district of the locality of the debtor.

Rationale

Under this section, an interim receiver may be appointed where the court is satisfied that a notice has been sent or is about to be sent by a secured creditor under s.244(1) (i.e., a notice of the creditor's intention to enforce its security). In order to appoint an interim receiver, the court must be satisfied that it is necessary for the protection of the estate or that it is in the interest of the creditor who sent the notice.

Subsection (1) includes triggers to terminate an interim receivership. The purpose of the provision was to ensure that interim receiverships, who are subject to less regulatory oversight than receivers, were indeed interim. There needed to be clear rules for when appointments ended as some creditors have used interim receivers in ways not originally intended. With the new triggers, creditors will be required to appoint a receiver, within the meaning of section 243.

To fulfill the objective of the section, subsection (1) is amended to clarify the timing and triggers for the termination of the appointment of an interim receiver. In particular, paragraphs (a) and (b) are amended to clarify that the interim receiver's appointment expires when the property over which the interim receiver was appointed is taken into the possession of a receiver or a trustee in bankruptcy. The amendment is made to address concerns that Chapter 47 may have resulted in the termination of an interim receivership appointment immediately upon the appointment of a receiver or trustee, even if the property was not under the control of that other professional. Since an interim receiver is only appointed where a court is satisfied that it is necessary for the protection of the property, it is prudent to ensure that the property does not fall into the hands of the debtor even momentarily. Paragraph (c) is amended to reduce the period during which an interim receiver may act from 60 days to 30 days. The 60-day period was introduced in Chapter 47 based on an understanding that some provinces required 60-days notice before certain property could be dealt with by a secured creditor. It was afterward determined that the longest notice period is.30 days. Since the intention of the provision is to limit the period that interim receivers may act, the correction will better reflect the intention of the provision. In addition, paragraphs (d) and (e) are removed to address concerns that strategic debtors could use these provisions to have an interim receivership terminated in circumstances in which the debtor had no real intention of completing a proposal.

Subsection (2) is amended to clarify the powers that may be exercised by an interim receiver. An interim receiver requires the ability to deal with perishable goods quickly or the value of those goods may be lost. While other powers were restricted by Chapter 47, there was no intention to prevent interim receivers from dealing with immediate needs.

Subsection (4) is added to clarify that an application for the appointment of a receiver be made in the locality of the debtor. The existing legislation is silent on where the application may be made. Accordingly, the application is often brought in a location that is more convenient for the creditor who is making the application, which may not have any connection with the place in which the debtor's business is located or where other creditors are located. This can have the effect of preventing smaller creditors from participating in the process because of the prohibitive cost of hiring legal counsel in a distant jurisdiction.

Present Law

As enacted by Chapter 47, Clause 30:

47.(1) If the court is satisfied that a notice is about to be sent or has been sent under subsection 244(1), it may, subject to subsection (3), appoint a trustee as interim receiver of all or any part of the debtor's property that is subject to the security to which the notice relates until the earliest of

  • (a) the appointment of a receiver within the meaning of subsection 243(2) in respect of any of the debtor's property,
  • (b) the filing of or making of an assignment by or in respect of the debtor,
  • (c) the granting of a bankruptcy order against the debtor,
  • (d) the filing of or making of a proposal by or in respect of the debtor,
  • (e) the filing of a notice of intention by the debtor, and
  • (f) the expiry of 60 days after the appointment, or any period specified by the court.

Bankruptcy and Insolvency Act:

  • (2) […]
  • (c) take such other action as the court considers advisable.

Bill Clause No. 15
Section No. BIA s.47.1
Topic: Interim Receivers

Proposed Wording

47.1(1.1) The appointment expires on the earliest of

  • (a) the taking of possession by a receiver, within the meaning of subsection 243(2), of the debtor's property over which the interim receiver was appointed,
  • (b) the taking of possession by a trustee of the debtor's property over which the interim receiver was appointed, and
  • (c) court approval of the proposal.

(2) […]

  • (d) take conservatory measures; and
  • (e) summarily dispose of property that is perishable or likely to depreciate rapidly in value.

(4) An application under subsection (1) is to be filed in a court having jurisdiction in the judicial district of the locality of the debtor.

Rationale

Under this section, an interim receiver may be appointed where a notice of intention or a proposal has been filed by a debtor. The court must be satisfied that the appointment is necessary for the protection of the estate or where it is in the interest of one or more of the creditors.

Subsection (1) includes triggers to terminate an interim receivership. The purpose of the provision was to ensure that interim receiverships, who are subject to less regulatory oversight than receivers, were indeed interim. There needed to be clear rules for when appointments ended as some creditors have used interim receivers in ways not originally intended. With the new triggers, creditors will be required to appoint a receiver, within the meaning of section 243.

To fulfill the objective of the section, subsection (1) is amended to clarify the timing and triggers for the termination of the appointment of an interim receiver. In particular, paragraphs (a) and (b) are amended to clarify that the interim receiver's appointment expires when the property over which the interim receiver was appointed is taken into the possession of a receiver or a trustee in bankruptcy. The amendment is made to address concerns that Chapter 47 may have resulted in the termination of an interim receivership appointment immediately upon the appointment of a receiver or trustee, even if the property was not under the control of that other professional. Since an interim receiver is only appointed where a court is satisfied that it is necessary for the protection of the property, it is prudent to ensure that the property does not fall into the hands of the debtor even momentarily.

Subsection (2) is amended to clarify the powers that may be exercised by an interim receiver. An interim receiver requires the ability to deal with perishable goods quickly or the value of those goods may be lost. While other powers were restricted by Chapter 47, there was no intention to prevent interim receivers from dealing with immediate needs.

Subsection (4) is added to clarify that an application for the appointment of a receiver be made in the locality of the debtor. The existing legislation is silent on where the application may be made. Accordingly, the application is often brought in a location that is more convenient for the creditor who is making the application, which may not have any connection with the place in which the debtor's business is located or where other creditors are located. This can have the effect of preventing smaller creditors from participating in the process because of the prohibitive cost of hiring legal counsel in a distant jurisdiction.

Present Law

As enacted by Chapter 47, Clause 31(2):

47.1(1.1) The appointment expires on the earliest of

  • (a) the appointment of a receiver within the meaning of subsection 243(2) in respect of any of the debtor's property,
  • (b) the filing of or making of an assignment by or in respect of the debtor,
  • (c) the event that causes an assignment by the debtor to be deemed,
  • (d) the granting of a bankruptcy order against the debtor, and
  • (e) the day on which the court approves the proposal.

(2) The court may direct an interim receiver appointed under subsection (1) to do any or all of the following:

  • (a) carry out the duties set out in subsection 50(10) or 50.4(7), in substitution for the trustee referred to in that subsection or jointly with that trustee;
  • (b) take possession of all or part of the debtor's property mentioned in the order of the court; and
  • (c) exercise such control over that property, and over the debtor's business, as the court considers advisable.

Bill Clause No. 16
Section No. BIA s.50
Topic: Proposals

Proposed Wording

50.(6)(a) a statement — or a revised cash-flow statement if a cash-flow statement had previously been filed under subsection 50.4(2) in respect of that insolvent person — (in this section referred to as a "cash-flow statement") indicating the projected cash-flow of the insolvent person on at least a monthly basis, prepared by the person making the proposal, reviewed for its reasonableness by the trustee and signed by the trustee and the person making the proposal;

(10)(a) file a report on the state of the insolvent person's business and financial affairs — containing the prescribed information, if any —

  • (i) with the official receiver without delay after ascertaining a material adverse change in the insolvent person's projected cash-flow or financial circumstances, and
  • (ii) with the court at any time that the court may order; and

[…]

(b) send, in the prescribed manner, a report on the state of the insolvent person's business and financial affairs — containing the trustee's opinion as to the reasonableness of a decision, if any, to include in a proposal a provision that sections.95 to 101 do not apply in respect of the proposal and containing the prescribed information, if any — to the creditors and the official receiver at least 10 days before the day on which the meeting of creditors referred to in subsection 51(1) is to be held.

Rationale

Paragraph (6)(a) was amended by Chapter 47 to provide better guidance on the preparation of cash-flow statements by mandating that they be prepared on a weekly basis. The intention was to provide creditors with better information on the status of the debtor than might otherwise be available. In order to add a measure of flexibility, the requirement has been relaxed to require cash-flow statements to be prepared on at least a monthly basis. It is open to the courts to decide that shorter periods would be more appropriate. The amendment addresses concerns that a rigid application of a weekly basis would be impossible for debtors with longer business cycles.

Paragraph (10)(a) is amended to clarify that the report referred to must be filed even without a regulation specifying what information is to be included.

Paragraph (10)(b) is amended to clarify that the report referred to must be filed even without a regulation specifying what information is to be included. In addition, it is amended to require that the trustee provide an opinion on the reasonableness of any decision by the debtor to exempt the proposal from the application of the fraudulent preferences and transfer at undervalue provisions. The amendment is intended to address concerns that creditors were not receiving sufficient information regarding such decisions.

Present Law

As enacted by Chapter 47, Clause 34(2):

50.(6)(a) a statement indicating, on a weekly basis, the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), or a revised cash flow statement if a cash-flow statement had previously been filed under subsection 50.4(2) in respect of that insolvent person, prepared by the person making the proposal, reviewed for its reasonableness by the trustee and signed by the trustee and the person making the proposal;

(10)(a) file a report on the state of the insolvent person's business and financial affairs, containing any prescribed information,

  • (i) with the official receiver forthwith after ascertaining any material adverse change in the insolvent person's projected cash-flow or financial circumstances, and
  • (ii) with the court at such other times as the court may order;

[…]

(b) send a report on the state of the insolvent person's business and financial affairs, containing any prescribed information, to the creditors and the official receiver, in the prescribed manner, at least ten days before the meeting of creditors referred to in subsection 51(1).


Bill Clause No. 17
Section No. BIA s.50.4
Topic: Notice of Intention

Proposed Wording

50.4(2)(a) a statement (in this section referred to as a "cash-flow statement") indicating the projected cash-flow of the insolvent person on at least a monthly basis, prepared by the insolvent person, reviewed for its reasonableness by the trustee under the notice of intention and signed by the trustee and the insolvent person;

(7)(b) shall file a report on the state of the insolvent person's business and financial affairs — containing the prescribed information, if any —

  • (i) with the official receiver without delay after ascertaining a material adverse change in the insolvent person's projected cash-flow or financial circumstances, and
  • (ii) with the court at or before the hearing by the court of any application under subsection (9) and at any other time that the court may order; and

Rationale

Paragraph (2)(a) was amended by Chapter 47 to provide better guidance on the preparation of cash-flow statements by mandating that they be prepared on a weekly basis. The intention was to provide creditors with better information on the status of the debtor than might otherwise be available. To be flexible, but to still ensure the flow of information, the requirement has been relaxed to require cash-flow statements to be prepared on at least a monthly basis. It is open to the courts to decide that shorter periods would be more appropriate. The amendment addresses concerns that a rigid application of a weekly basis would be impossible for debtors with longer business cycles.

Paragraph (10)(a) is amended to clarify that the report referred to must be filed even without a regulation specifying information to be included.

Present Law

As enacted by Chapter 47, Clause 35(2):

50.4(2)(a) a statement indicating, on a weekly basis, the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), prepared by the insolvent person, reviewed for its reasonableness by the trustee under the notice of intention, and signed by the trustee and the insolvent person;

Bankruptcy and Insolvency Act:

(7)(b) shall file a report on the state of the insolvent person's business and financial affairs, containing any prescribed information,

  • (i) with the official receiver forthwith after ascertaining any material adverse change in the insolvent person's projected cash-flow or financial circumstances, and
  • (ii) with the court at or before the hearing by the court of any application under subsection (9) and at such other times as the court may order.

Bill Clause No. 18
Section No. BIA s.50.6
Topic: Interim Financing

Proposed Wording

50.6(1) On application by a debtor in respect of whom a notice of intention was filed under section 50.4 or a proposal was filed under subsection 62(1) and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the debtor's property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the debtor an amount approved by the court as being required by the debtor, having regard to the debtor's cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be. The security or charge may not secure an obligation that exists before the order is made.

(2) In the case of an individual,

  • (a) they may not make an application under subsection (1) unless they are carrying on a business; and
  • (b) only property acquired for or used in relation to the business may be subject to the security or charge.

(3) The court may order that the security or charge ranks in priority over the claim of any secured creditor of the debtor.

(4) The court may order that the security or charge ranks in priority over any security or charge arising from a previous order made under subsection (1) only with the consent of the person in whose favour the previous order was made.

(5) In deciding whether to make an order, the court is to consider, among other things,

  • (a) the period during which the debtor is expected to be subject to proceedings under this Act;
  • (b) how the debtor's business and financial affairs are to be managed during the proceedings;
  • (c) whether the debtor's management has the confidence of its major creditors;
  • (d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor;
  • (e) the nature and value of the debtor's property;
  • (f) whether any creditor would be materially prejudiced as a result of the security or charge; and
  • (g) the trustee's report referred to in paragraph 50(6)(b) or 50.4(2)(b), as the case may be.

Rationale

The potential for a successful proposal may be enhanced by providing for interim financing during the process. Chapter 47 codified the existing practice that courts may grant interim financing lenders a priority charge over existing secured creditors. The intention was to encourage lenders to deal with the financially troubled debtor.

Subsection (1) is amended in order to clarify that the priority charge can be granted over all or only part of the debtor's property. To prevent potential abuse, it is also clarified that the priority charge may not apply to existing debts. The practice of including pre-filing debts as part of the interim financing priority charge puts existing creditors at a disadvantage with no benefit for the debtor or the proposal process. In addition, since the court-ordered charge may affect existing secured creditors, subsection (1) is amended to require that notice of the court application be given to those secured creditors who are likely to be affected by the charge so that they may defend their interests.

Subsection (2) has been added to clarify that the provision also applies to individuals carrying on business; however, the priority charge may only be granted over business property. The purpose of the interim financing is to try to rescue the individual's troubled business; therefore, the security or charge should only cover property acquired or used in the course of business.

Subsection (5) sets out the factors to be considered by the court before granting the priority charge. Paragraph (d) is amended to clarify that it is the effect of the financing on the proposal process that is significant. The amendment addresses concerns that the factor was too vague because it only spoke of continued operations but does not specify that it was post-proposal operations that should be considered. Paragraph (g) clarifies that the court should consider the reasonableness of the cash-flow statement, not simply if one has been filed.

Present Law

As enacted by Chapter 47, Clause 36:

50.6(1) A court may, on the application of a debtor, other than an individual, in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1), make an order, on any conditions that the court considers appropriate, declaring that the debtor's property is subject to a security or charge in favour of any person specified in the order who agrees to lend to the debtor an amount that is approved by the court as being required by the debtor, having regard to the debtor's cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be,

  • (a) for the period of 30 days after the filing of the notice of intention;
  • (b) for the period of 30 days after the filing of the proposal, if no notice of intention has been filed under section 50.4 in respect of the debtor; or
  • (c) for any period specified in the order, if notice of the application has been given to the secured creditors likely to be affected by the security or charge.

(2) The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the debtor.

(3) The court may, in the order, specify that the security or charge ranks in priority over any security or charge arising from a previous order made under subsection (1) only with the consent of the person in whose favour the previous order was made.

(4) In deciding whether to make the order, the court must consider, among other things,

  • (a) the period the debtor is expected to be subject to proceedings under this Act;
  • (b) how the debtor's business and financial affairs are to be governed during the proceedings;
  • (c) whether the debtor's management has the confidence of its major creditors;
  • (d) whether the loan agreement will enhance the debtor's prospects as a going concern if the proposal is approved;
  • (e) the nature and value of the debtor's property;
  • (f) whether any creditor will be materially prejudiced as a result of the debtor's continued operations; and
  • (g) if notice of the application was given to the secured creditors, whether the debtor has provided a cash-flow statement for the period ending 120 days after the making of the application for the order.

Bill Clause No. 19
Section No. BIA s.54(2)
Topic: Voting Rights

Proposed Wording

54.(2)(d) the proposal is deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors — other than, unless the court orders otherwise, a class of creditors having equity claims — vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution.

Rationale

This section deals with the right of creditors to vote at meetings during the proposal process. The amendment is intended to clarify that equity claims are to be subordinate to other claims. As ownership interests, equity interests should be subject to the full risks of insolvency.

Paragraph (d) is amended to mandate that, unless the court orders otherwise, holders of equity claims are prevented from voting those claims at any meeting. The intention of the reform is to prevent holders of equity claims from influencing the proposal process where it would be inappropriate for them to do so. Flexibility is given to the court to allow equity claimants to vote in cases when it is appropriate (e.g. there would be residual value for shareholders).

Present Law

Bankruptcy and Insolvency Act:

54.(2)(d) the proposal shall be deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution.


Bill Clause No. 20
Section No. BIA s.54.1
Topic: Voting by Equity Claimants

Proposed Wording

s.4.1Despite paragraphs.54(2)(a) and (b), creditors having equity claims are to be in the same class of creditors in relation to those claims unless the court orders otherwise and may not, as members of that class, vote at any meeting unless the court orders otherwise.

Rationale

The amendment is intended to clarify that equity claims are to be subordinate to other claims. As ownership interests, equity interests should be subject to the full risks of insolvency.

The amendment mandates that, unless the court orders otherwise, holders of equity claims be placed in their own class and prevented from voting those claims at any meeting. The intention of the reform is to prevent holders of equity claims from influencing the proposal process where it would be inappropriate for them to do so. Flexibility is given to the court to allow equity claimants to vote in cases when it is appropriate (e.g. there would be residual value for shareholders).

Present Law

None.