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CCAA: Initial application

Clause by Clause Briefing Book

An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Acts


Bill Clause No. 128
Section No. 11.09
Topic: Her Majesty Stay

Proposed Wording

11.09 (1) An order made under section 11.02 may provide that

  • (a) Her Majesty in right of Canada may not exercise rights under subsection 224(1.2) of the Income Tax Act or any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, in respect of the company if the company is a tax debtor under that subsection or provision, for the period that the court considers appropriate but ending not later than
    • (i) the expiry of the order,
    • (ii) the refusal of a proposed compromise by the creditors or the court,
    • (iii) six months following the court sanction of a compromise or an arrangement,
    • (iv) the default by the company on any term of a compromise or an arrangement, or
    • (v) the performance of a compromise or an arrangement in respect of the company; and
  • (b) Her Majesty in right of a province may not exercise rights under any provision of provincial legislation in respect of the company if the company is a debtor under that legislation and the provision has a purpose similar to subsection 224(1.2) of the Income Tax Act, or refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, and the sum
    • (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
    • (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection,
    for the period that the court considers appropriate but ending not later than the occurrence or time referred to in whichever of subparagraphs (a)(i) to (v) that may apply.

(2) The portions of an order made under section 11.02 that affect the exercise of rights of Her Majesty referred to in paragraph (1)(a) or (b) cease to be in effect if

  • (a) the company defaults on the payment of any amount that becomes due to Her Majesty after the order is made and could be subject to a demand under
    • (i) subsection 224(1.2) of the Income Tax Act,
    • (ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
    • (iii) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, and the sum
      • (A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
      • (B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection; or
  • (b) any other creditor is or becomes entitled to realize a security on any property that could be claimed by Her Majesty in exercising rights under
    • (i) subsection 224(1.2) of the Income Tax Act,
    • (ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
    • (iii) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, and the sum
      • (A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
      • (B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection.

(3) An order made under section 11.02, other than the portions of that order that affect the exercise of rights of Her Majesty referred to in paragraph (1)(a) or (b), does not affect the operation of

  • (a) subsections 224(1.2) and (1.3) of the Income Tax Act,
  • (b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
  • (c) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, and the sum
    • (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
    • (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection,
    and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2) of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.

Rationale

The reform is a technical amendment to re-order provisions of this Act, correct cross-referencing and correct for grammatical errors.

The chapeau of subsections (2) and (3) have been amended to clarify that it is only the portion of the court order that creates a stay respecting Her Majesty rights that is affected by the operation of the subsections. The remainder of the court order is intended to continue in force.

Present Law

11.4 (1) An order made under section 11 may provide that

  • (a) Her Majesty in right of Canada may not exercise rights under subsection 224(1.2) of the Income Tax Act or any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, in respect of the company if the company is a tax debtor under that subsection or provision, for such period as the court considers appropriate but ending not later than
    • (i) the expiration of the order,
    • (ii) the refusal of a proposed compromise by the creditors or the court,
    • (iii) six months following the court sanction of a compromise or arrangement,
    • (iv) the default by the company on any term of a compromise or arrangement, or
    • (v) the performance of a compromise or arrangement in respect of the company; and
  • (b) Her Majesty in right of a province may not exercise rights under any provision of provincial legislation in respect of the company where the company is a debtor under that legislation and the provision has a similar purpose to subsection 224(1.2) of the Income Tax Act, or refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum
    • (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
    • (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection,
    • for such period as the court considers appropriate but ending not later than the occurrence or time referred to in whichever of subparagraphs (a)(i) to (v) may apply.

(2) An order referred to in subsection (1) ceases to be in effect if

  • (a) the company defaults on payment of any amount that becomes due to Her Majesty after the order is made and could be subject to a demand under
    • (i) subsection 224(1.2) of the Income Tax Act,
    • (ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
    • (iii) under any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum
      • (A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
      • (B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection; or
  • (b) any other creditor is or becomes entitled to realize a security on any property that could be claimed by Her Majesty in exercising rights under
    • (i) subsection 224(1.2) of the Income Tax Act,
    • (ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
    • (iii) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum
      • (A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
      • (B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection.

(3) An order made under section 11, other than an order referred to in subsection (1) of this section, does not affect the operation of

  • (a) subsections 224(1.2) and (1.3) of the Income Tax Act,
  • (b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts, or
  • (c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum
    • (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or
    • (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a "provincial pension plan" as defined in that subsection,
    and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2) of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.

Senate Recommendation

None.

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Bill Clause No. 128
Section No. 11.51
Topic: Director Indemnification

Proposed Wording

11.51 (1) The court may, on the application of a debtor company, make an order declaring that the property of the company is subject to a security or charge, in an amount that the court considers appropriate, in favour of any director or officer of the company to indemnify the director or officer against obligations and liabilities that he or she may incur as a director or an officer of the company after the commencement of proceedings against the company under this Act.

(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 company.

(3) The court shall not make the order if, in its opinion, the company could obtain adequate indemnification insurance for the director or officer at a reasonable cost.

(4) The court shall make an order declaring that the security or charge does not apply in respect of a specific obligation or liability incurred by a director or an officer if it is of the opinion that the obligation or liability was incurred as a result of the director's or officer's gross negligence or wilful misconduct or, in the Province of Quebec, the director's gross or intentional fault.

Rationale

Directors of corporations are subject to legal liabilities created by statute and case law. While it is recognized that those who accept the responsibility of the position should do so after serious consideration of their abilities and the expectations, increasing personal liability for directors in more areas can reduce the pool of qualified candidates.

Directors and officers are confronted with significant, statutorily created personal liability, including for unpaid wages and taxes, when the business they are engaged by suffers financial difficulties. Some statutory liabilities provide for a due diligence defence but not all. Because of the risks in an insolvency situation that are out of the directors' control, many question the wisdom of acting for a company during a restructuring. In some instances, directors have resigned en masse rather than accept the liability – leaving the business without experienced direction or control when it needs it most.

The purpose of the reform is to provide directors and officers with greater protection against personal liability that may arise due to circumstances beyond their control in an insolvency proceeding. During a restructuring, companies often suffer restricted cash flow making it difficult for the directors and officers to ensure that all parties are paid. By providing directors with indemnification under specific circumstances, more directors should be willing to continue to act, which would increase the likelihood of a successful restructuring.

Subsection (1) provides certain limits to the indemnity. First, the amount of an indemnity is subject to court determination to ensure that other creditors are not unfairly prejudiced by a conservative approach taken by the debtor for the directors' protection. Allowing the company to determine the appropriate indemnity would result in a conflict of interest, as the directors would effectively have the ability to protect themselves. Second, the indemnity only applies in respect of obligations or liabilities incurred after the date of a filing. The restriction should force directors to act quickly to address the company's financial problems.

Subsection (2) provides the court with the ability to determine the priority of the security charge.

Subsection (3) limits the circumstances in which a court could grant an indemnity against the property of the debtor. Where directors' and officers' insurance is available, that option would almost always be the preferred choice, however, some D&O insurance policies either eliminate or restrict coverage after an insolvency filing. Therefore, there may be few choices but for the directors to seek the statutory indemnity.

Subsection (4) restricts the indemnity to circumstances where the directors and officers have acted with due regard to their duties. A finding of a court that an obligation or liability arose due to the director's or officer's gross negligence or wilful misconduct would negate the ability of that person to access the indemnity. The provision is open ended to allow any party interested to bring an application, or a court acting of its own accord, to challenge the standard of conduct of the director or officer.

Present Law

None.

Senate Recommendation

Senate recommendation #25 proposed a general due diligence defence against personal liability for directors. The creation of an indemnification process for directors and officers, coupled with the specified limitations, addressed the Senate concerns regarding directors' liability while simplifying the process.

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Bill Clause No. 128
Section No. 11.52
Topic: Professional Costs

Proposed Wording

11.52 The court may make an order declaring that property of a debtor company is subject to a security or charge, in an amount that the court considers appropriate, in respect of

  • (a) the costs of the monitor, including the remuneration and expenses of any financial, legal or other experts engaged by the monitor in the course of the monitor's duties;
  • (b) the remuneration and expenses of any financial, legal or other experts engaged by the company for the purpose of proceedings under this Act; and
  • (c) the costs of any interested party in relation to the remuneration and expenses of any financial, legal or other experts engaged by it, if the court is satisfied that the incurring of those costs is necessary for the effective participation of the interested party in the proceedings under this Act.

Rationale

The process of preparing a compromise or arrangement under the CCAA can be a time consuming and expensive proposition for all of the parties involved. To obtain an agreement requires negotiations between the debtor, creditors and other stakeholders. To negotiate, the parties may require financial, legal and other expertise to assist them. The expense of engaging such professionals may be beyond the resources of many stakeholders, including unions or employee groups, pensioners and trade creditors. Stakeholders without the necessary resources may be unable to participate effectively, thereby reducing their ability to protect their interests.

The intention of the reform is to ensure effective participation of interested stakeholders – either directly, if they are large creditors, or indirectly as part of a creditors' group or stakeholders group. It is expected that the court will limit the application of this provision to situations where a group of small creditors may be jointly represented rather than allow each creditor to engage their own experts at the debtor's expense.

The reform provides the court with legislative authority to grant certain parties a priority charge over the assets of an entity that has commenced proceedings respecting a proposal. Paragraph (a) provides for the expenses of monitors. Paragraph (b) provides for the cost of the debtor company's own legal and financial professionals. Because the debtor is cash-restricted and may be unable to pay its ongoing obligations, professionals would be unlikely to act for the debtor without some guarantee of payment. These professionals regularly receive a priority charge in current practice. Paragraph (c) provides for third party's professional costs to be paid. Stakeholder groups have stated that small creditors tend not to be well represented during negotiations because the cost of engaging professionals is too high. The reform is intended to increase the ability of more creditors to act.

Present Law

None.

Senate Recommendation

None.

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Bill Clause No. 129
Section No. 11.7
Topic: Monitors

Proposed Wording

11.7 (1) When an order is made on the initial application in respect of a debtor company, the court shall at the same time appoint a person to monitor the business and financial affairs of the company. The person so appointed must be a trustee, within the meaning of subsection 2(1) of the Bankruptcy and Insolvency Act.

(2) Except with the permission of the court and on any conditions that the court may impose, no trustee may be appointed as monitor in relation to a company

  • (a) if the trustee is or, at any time during the two preceding years, was
    • (i) a director, an officer or an employee of the company,
    • (ii) related to the company or to any director or officer of the company, or
    • (iii) the auditor, accountant or legal counsel, or a partner or an employee of the auditor, accountant or legal counsel, of the company; or
  • (b) if the trustee is
    • (i) the trustee under a trust indenture issued by the company or any person related to the company, or the holder of a power of attorney under an act constituting a hypothec within the meaning of the Civil Code of Quebec that is granted by the company or any person related to the company, or
    • (ii) related to the trustee, or the holder of a power of attorney, referred to in subparagraph (i).

(3) On application by a creditor of the company, the court may, if it considers it appropriate in the circumstances, replace the monitor by appointing another trustee, within the meaning of subsection 2(1) of the Bankruptcy and Insolvency Act, to monitor the business and financial affairs of the company.

Rationale

The monitor in a CCAA proceeding acts as an officer of the court. It plays a vital role observing and reporting on the management and governance of the debtor company to the court. The party who acts as monitor must be professional, competent and reliable.

Subsection (1) requires that the monitor be a licensed trustee. This ensures that the person acting is a professional who has been trained and examined for their competence. Further, it ensures that the monitor is accountable for errors or omissions because licensed trustees are subject to discipline under the Office of the Superintendent of Bankruptcy.

Subsection (2) protects against conflicts of interests that may affect the performance of the monitor. Currently, the debtor company's auditor may act as monitor. This may create a perception of bias in the minds of creditors and stakeholders. The reform extends the prohibition against related parties to levels on par with best practice in corporate governance.

Subsection (3) provides creditors with an opportunity to seek the removal of a monitor. The practice is that the debtor company chooses its monitor. The creditors do not have an opportunity at the initial hearing to oppose the appointment of the monitor. The provision will allow a creditor to challenge a relationship that is inappropriate for any reason.

Present Law

11.7 (1) When an order is made in respect of a company by the court under section 11, the court shall at the same time appoint a person, in this section and in section 11.8 referred to as "the monitor", to monitor the business and financial affairs of the company while the order remains in effect.

(2) Except as may be otherwise directed by the court, the auditor of the company may be appointed as the monitor.

Senate Recommendation

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