Statutory Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act

Discussion Paper

Notice

The public consultation on the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act closed on July 15, 2014.

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Cat. No. Iu173-5/2014E-PDF
ISBN 978-1-100-23479-3

© Her Majesty the Queen in Right of Canada, represented by the Minister of Industry, 2014.

Aussi offert en français sous le titre Direction de l'entreprise, de la concurrence et de l'insolvabilité.

Table of Contents


Executive Summary

Pursuant to a statutorily-mandated review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act, Industry Canada is conducting public consultations to obtain submissions from interested Canadians regarding Canada's insolvency legislation. The discussion paper, which sets out numerous issues identified from key stakeholder input and an environmental scan of the insolvency marketplace, is intended to provide a framework for the public consultations.

The discussion paper is divided into four sections: first, an introduction; second, consumer insolvency issues; third, commercial insolvency issues; and, finally, administrative and technical issues.

The introduction provides general information regarding Canada's insolvency regime and the policy objectives that underlie it, as well as recent marketplace changes and insolvency trends.

The sections on consumer and commercial issues set out broad themes under which specific issues may be found. For example, the consumer insolvency themes include protection of consumer interests, the "fresh start" principle, consumer exemptions, protecting families, and treatment of student loans in bankruptcy. The commercial insolvency themes include encouraging restructuring, protecting vulnerable creditors and enhancing equity, deterring fraud and abuse, and cross-border insolvencies.

The section on administrative and technical issues sets out a number of discrete matters, including renaming the Bankruptcy and Insolvency Act, creating a unified insolvency Act, and marshalling of charges.

Pursuant to the statutory review provisions contained in both Acts, the Minister of Industry is to table a report in Parliament on the "provisions and operations" of the Act by September 2014. The report would then be referred to a Parliamentary committee for study and report within 12 months of the initial tabling. Any decisions regarding possible legislative or regulatory reforms as part of the statutory review would be taken following consideration of the Parliamentary committee's study and report.

Introduction

The Importance of Insolvency Law

Insolvency laws have a significant impact on the economy. Insolvency rules offer security for investors and lenders in both consumer and commercial borrowing transactions. This, in turn, influences credit market risks, which can affect the cost and availability of credit. In the commercial sphere, the reliability of the insolvency system plays a role in attracting domestic and foreign investment, as well as in promoting entrepreneurship and innovation.

One of the principal considerations in an era of increased globalization and competitiveness is how to make the insolvency process as efficient as possible, while maintaining fairness. By facilitating corporate restructuring and directing assets to productive use, the insolvency system contributes to Canada's economic competitiveness and performance.

Rules governing personal insolvency play an important socio-economic role. They allow honest but unfortunate individuals who experience difficult financial distress to release their debts and obtain a fresh start. The consumer insolvency provisions are aimed at balancing the interests of debtors with the interest of creditors who extended credit in the expectation of repayment.

As such, insolvency laws contribute in a meaningful way to the effective and efficient functioning of the marketplace.

Canada's Insolvency Regime

Legislative Framework

The insolvency regime makes up part of Canada's fundamental marketplace framework laws and relies on two main statutes: the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA).

The BIA provides a legislative framework to address both consumer and commercial insolvency situations. In bankruptcy, the Act provides for the liquidation of the bankrupt's assets by a trustee and the distribution of the proceeds in a fair and orderly way among the creditors. Alternatively, the Act provides a mechanism for insolvent consumers or commercial debtors to avoid bankruptcy by negotiating settlements with their creditors to reorganize the debtor's financial affairs.

The CCAA provides a legislative framework for the reorganization of insolvent commercial debtors under the court's supervision. It enables an insolvent business to seek a court order staying its creditors from taking action against it while it negotiates an arrangement with them for the rescheduling or compromise of its debts. The CCAA provides a more flexible, court-driven process than the BIA. Businesses reorganizing under the Act must have more than $5 million in debt.

Administrative Framework

Canada's insolvency regime's administrative framework is supported by three pillars:

  • Office of the Superintendent of Bankruptcy (OSB): regulator with oversight responsibilities for the insolvency system;
  • Trustees-in-Bankruptcy: licensed by the Superintendent, they are responsible for administering estates and performing various roles under the BIA and CCAA; and
  • Courts (including registrars in bankruptcy): supervise CCAA proceedings and adjudicate matters under both the BIA and CCAA.

The OSB has statutory responsibility to supervise the administration of all estates and matters under the BIA. Additionally, the OSB has certain functions under the CCAA, including maintaining a public record of CCAA proceedings and investigating complaints regarding the conduct of monitors. In fulfilling its mandate, the OSB sets standards and provides guidance to stakeholders regarding expected conduct through Directives, notices, position papers and programs.

Trustees-in-bankruptcy are responsible for administering insolvencies and can often be engaged to provide advice to financially distressed individuals and businesses. They work with the debtor to complete necessary steps in a bankruptcy, proposal to creditors or restructuring. This involves filing documents with the OSB and ensuring the debtor fulfills the requirements under the BIA or CCAA. Where the debtor fails to fulfill the requirements, as an officer of the court, the trustee is to bring the issues to the attention of the creditors and the court.

The role of the courts varies depending upon the nature of the proceeding. Most individuals who file for bankruptcy will not be required to go to court. Instead, they will obtain a discharge from bankruptcy after the specified period of time through an automatic process. If a trustee or creditor opts to oppose a bankrupt's discharge, the matter is brought to the courts. In other proceedings, the courts are involved at various stages. For example, the courts may be required to resolve disputes or sanction specific actions proposed by the debtor or creditors. In CCAA proceedings, the court plays a key role. Court approval is required to commence a proceeding and it may make various other orders, including approving interim financing, the process for sale of assets, and the disclaimer of contracts. Courts are also responsible for sanctioning any plan of arrangement or compromise.

Objectives of Insolvency Law

Insolvency laws aim to minimize the impact of a debtor's insolvency on all stakeholders. They do this by pursuing the key objectives of equitable distribution of the debtor's assets, and, where possible, by rehabilitation of the debtor.Footnote 1 As noted by the Supreme Court of Canada:

The very design of insolvency legislation raises difficult policy issues for Parliament. Legislation that establishes an orderly liquidation process for situations in which reorganization is not possible, that averts races to execution and that gives debtors a chance for a new start is generally viewed as a wise policy choice. Such legislation has become part of the legal and economic landscape in modern societies. But it entails a price, and those who might have to pay that price sometimes strive mightily to avoid it. Despite the proven wisdom of the policies underpinning the insolvency legislation, it is understandable that few appreciate the "haircuts" or even outright losses that bankruptcies trigger.Footnote 2

It is generally accepted that the objectives of insolvency law may be achieved through legislation that does the following:

  • provides certainty in the market to promote economic stability and growth;
  • maximizes value of assets;
  • strikes a balance between liquidation and reorganization;
  • ensures equitable treatment of similarly situated creditors;
  • provides for timely, efficient and impartial resolution of insolvency;
  • preserves the insolvency estate to allow equitable distribution to creditors;
  • ensures a transparent and predictable insolvency law that contains incentives for gathering and dispensing information; and
  • recognizes existing creditor rights and establishes clear rules for ranking of priority claims.Footnote 3

It is in this context that Canada's insolvency laws have been developed by Parliament and have evolved through court decisions.

Marketplace Changes

Since the last public consultations on insolvency laws conducted in 2001-2002, which resulted in the legislative reforms of 2008 and 2009, the characteristics of the Canadian consumer marketplace have changed. The ratio of consumer debt to personal disposable income in Canadian households has increased from approximately 110 percent in 2000 to 160 percent in 2012.Footnote 4 The increase can be attributed to higher mortgage debt levels and an increase in home equity extraction, both associated with elevated housing prices.Footnote 5 Higher mortgage debt levels are a potential source of risk as Canadians may be more vulnerable to a decline in housing prices or an increase in interest rates.

In the commercial context, marketplace changes include the growing importance of intellectual property to Canadian companies, the use of more complex corporate structures, a shift by lenders away from relationship lending, significant growth in the use of derivatives to hedge risk and in the practice of distressed debt trading, and an increasing number of cross-border insolvency proceedings. At the same time, the cost and complexity of restructuring proceedings, particularly under the CCAA, continues to grow, resulting in a shift towards other types of workout arrangements such as private workouts and arrangements under the Canada Business Corporations Act.

Insolvency Trends

National Insolvency Rates

Figure 1 illustrates the national consumer and business insolvency rates between 2000 and 2012.Footnote 6 An overview of insolvency rates provides a clearer picture of trends than does the total volume alone, because it takes into account changes in population sizes over time. As shown in Figure 1, consumer and business insolvency rates have trended in opposite directions during the past decade. The consumer insolvency rate remained relatively steady from 2002 to 2007 before increasing to 5.8 during the economic downturn in 2009 and declining in subsequent years. In 2000 and 2012, the national consumer insolvency rates were 3.7 and 4.4, respectively. This represents an 18 percent increase in the insolvency rate over this period. On the other hand, other than a small increase during the 2001 economic downturn, business insolvency rates have trended downward throughout the decade. In 2000 and 2012, the national business insolvency rates were 5.7 and 1.8 respectively, representing a 68.4 percent decrease.

Figure 1: Consumer and Business Insolvency Rates
Line graph of Figure 1: Consumer and Business Insolvency Rates (the long description is located below the image)
Description of Figure 1
Consumer and Business Insolvency Rates
Year Consumer Insolvency Rate Business Insolvency Rate
2000 3.7 5.7
2001 3.9 5.8
2002 3.8 5.2
2003 4.1 4.8
2004 4 4.2
2005 4.1 4.1
2006 3.8 3.5
2007 3.9 3.2
2008 4.4 3.1
2009 5.8 2.9
2010 5.1 2.3
2011 4.6 2.0
2012 4.4 1.8

Consumer Insolvency Rate - by Age and Regional Breakdowns

Insolvency does not affect all segments of society equally. Variations in the rates of insolvency by age cohort and by geographic region provide important information regarding insolvency trends in Canada.

Figure 2 shows the national consumer insolvency rate by age cohort. During the past decade, younger Canadians (those between 18 and 34) became significantly less likely to commence insolvency proceedings. On the other hand, Canadians aged 35 and older become more likely to enter insolvency proceedings. This demographic trend is consistent with anecdotal reports that delayed transitions to adulthood among younger Canadians may be placing a greater financial burden on the parents of adult offspring.Footnote 7

It is also important to note that while the insolvency rate of individuals over the age of 65 has increased over the past decade, it still remains well below the national average.

Figure 2: Insolvency Rates by Age Group
Line graph of Figure 2: Insolvency Rates by Age Group (the long description is located below the image)
Description of Figure 2
Insolvency Rates by Age Group
  Total 18-24 25-34 35-44 45-54 55-64 65+
2003 4.1 1.94 5.98 6.25 4.52 3.15 1.21
2004 4 1.99 5.76 6.01 4.58 3.3 1.39
2005 4.1 1.97 5.64 6 4.68 3.39 1.5
2006 3.8 1.82 5.35 5.71 4.44 3.26 1.44
2007 3.9 1.86 5.29 5.94 4.55 3.26 1.48
2008 4.4 1.95 6 6.72 5.16 3.72 1.71
2009 5.8 2.03 7.35 8.89 6.99 5.06 2.24
2010 5.1 1.38 5.95 7.8 6.39 4.7 2.31
2011 4.6 0.99 5.01 7.11 5.94 4.34 2.26
2012 4.4 0.9 4.57 6.89 5.78 4.2 2.09

There is also significant regional variation in consumer insolvency rates. Between 2000 and 2012, the consumer insolvency rate has increased in Atlantic Canada, Quebec, and Ontario. There has been a better experience in Western Canada as the insolvency rates in Alberta and British Columbia have remained relatively constant while in Saskatchewan and Manitoba they have decreased slightly. Furthermore, the Atlantic Provinces, Quebec, and Ontario continue to have insolvency rates that are higher than the national rate, while the Western provinces and the Prairie provinces have rates that are lower than the national average.

The higher insolvency rates in Atlantic Canada, Quebec, and Ontario may reflect the underlying economic conditions compared to Western Canada. There is empirical support for the hypothesis that unemployment rates and the growth rates are significant in explaining the variation in insolvency filings.Footnote 8 For example, in recent years economic growth rates in Alberta, Saskatchewan, and Manitoba have been higher than the national average, while growth rates in Ontario, Quebec, and Atlantic Canada have been lower.Footnote 9 Additionally, Western Canada's unemployment rates are lower than the national average, while Atlantic Canada's unemployment rate is higher.Footnote 10

Figure 3: Consumer Insolvency Rates of Insolvency by Region
Line graph of Figure 3: Consumer Insolvency Rates of Insolvency by Region (the long description is located below the image)
Description of Figure 3
Consumer Insolvency Rates of Insolvency by Region
  Canada Atlantic Quebec Ontario Manitoba/SASK Alberta BC
2000 3.73 3.63 4.78 3.27 3.01 4.20 3.20
2001 3.91 4.29 4.90 3.52 3.29 3.93 3.29
2002 3.84 4.19 4.33 3.70 3.43 3.94 3.30
2003 4.09 4.69 4.43 4.07 3.70 4.30 3.22
2004 4.04 5.08 4.47 4.08 3.53 4.03 2.85
2005 4.05 5.53 4.51 4.16 3.59 3.47 2.78
2006 3.83 5.07 4.74 4.02 3.12 2.44 2.43
2007 3.89 4.96 4.85 4.32 2.75 2.19 2.28
2008 4.52 5.58 5.64 5.05 2.82 2.75 2.55
2009 5.83 6.67 6.77 6.59 3.42 4.38 3.69
2010 5.11 6.43 6.07 5.50 3.04 3.80 3.55
2011 4.60 5.76 5.68 4.84 2.53 3.46 3.21

Growth in Consumer Proposals and Business Proposals

In recognition of the benefits of proposals for insolvent Canadians and their creditors, the 2008-2009 reforms were intended to encourage their use. Figure 4 illustrates the growth in consumer and business proposals under the BIA, as a percentage of total insolvency filings, since 2007. During the same period, the proportion of business proposals as a percentage of total business insolvency filings increased from 17.3% to 25.7%.

Figure 4: Proposal Growth - Consumer and Business Insolvencies
Line graph of Figure 4: Proposal Growth - Consumer and Business Insolvencies (the long description is located below the image)
Description of Figure 4
Proposal Growth - Consumer and Business Insolvencies
  Consumer Proposals Business Proposals
2007 22.2 17.3
2008 21.7 17.2
2009 23.3 19.5
2010 31.3 22.1
2011 36.6 23.7
2012 39.6 25.7

Conclusion

Insolvency laws touch on all aspects of economic life, both for consumers and businesses. They affect the ability of borrowers to access credit, the decisions of investors, and the level of disruption produced by the exit of inefficient firms from the marketplace. They also provide over-indebted consumers with an opportunity to obtain a fresh start and renewed financial health. As a result, it is important to Canada's overall economic performance that its insolvency legislation remains modern, effective and efficient.

In the consumer insolvency context, growing consumer debt levels and changes in demographic insolvency trends – which show that younger Canadians are less likely, and those between the ages of 45 and 54 are more likely, to become insolvent – suggest potential areas for policy focus. Emerging trends in commercial debt markets, including the growth in distressed debt trading and the use of derivatives to hedge economic risk, also suggest areas for policy consideration.

As Canada reviews its insolvency legislation, the overarching objectives of maximizing value, providing a balanced and equitable regime, and ensuring efficient and effective processes will form a base for the policy discussion.

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