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Recent Changes to the Bankruptcy and Insolvency Act and Companies’ Creditors Arrangement Act: Effective November 1, 2019

Nov 28, 2019

By Samantha Bogoroch, Associat​e - Litigation

Image: Samantha Bogoroch, Litigation Lawyer

Both the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”) (collectively, the “Acts”) were recently amended. These amendments will have a significant impact on both insolvency proceedings and the practice of insolvency law. However, these amendments will only affect proceedings commenced after November 1, 2019. Any proceedings commenced before November 1, 2019, will not be affected by these changes.

The BIA and CCAA amendments are summarized below:

Duty of Good Faith:

The Acts now impose a general duty of good faith on “any interested person” in a proceeding. Although both “good faith” and “interested person” are not defined by the Acts, if a Court is satisfied that an interested person does not act in good faith, the Court may make any order that it considers appropriate in the circumstances.

Registered Disability Savings Plans:

Currently, RRSPs and RRIFs are listed as exempt property, meaning, money in those accounts cannot be divided among a bankrupt’s creditors. The BIA has now added Registered Disability Savings Plans to the list of exempt property, unless contributions were made in the 12 months before the date of bankruptcy. Like RRSPs and RRIPS, the money held in a Registered Disability Savings Plan cannot be divided among creditors.

Expansion of Directors’ and Officers’ Liability:

Under the BIA, trustees have several ways to obtain recourse against officers and directors who receive compensation at unfair valuations. With the amendments, trustees will be able to inquire into the payment of termination pay, severance pay, or incentive benefits to directors, officers, and any manager or supervisor of a business for the period of one year before the date of bankruptcy.

The BIA now provides the Courts with the ability to find directors and officers liable to a trustee if they received payments for dividends, share redemptions, or share purchases that were made during the one-year period before the date of bankruptcy. In order to find directors and officers liable, the Court must be satisfied that (1) payment occurred when the corporation was insolvent or was rendered insolvent, (2) payment was conspicuously over the fair market value of the consideration received; and (3) payment was made outside the ordinary course of business. While a trustee may bring a claim against officers and directors, it is the directors and officers who must prove that the three elements above have not been met. The Court must then be satisfied that the directors or officers did not have reasonable grounds to believe that the payment violated these elements. Further, directors and officers have an additional reverse onus in proving that there were reasonable grounds for payment. In determining liability, the Courts must consider the defence of due diligence.

Initial Application Stay Period:

All CCAA proceedings are commenced by way of an initial application where the Court grants a 30 day stay of proceedings. The new amendments to the CCAA reduce the initial stay period from 30 days to 10 days. In addition, the initial relief sought by a CCAA applicant will be limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period. The CCAA amendments will effectively decrease the Court’s jurisdiction and discretion with respect to CCAA proceedings.

Disclosure of Economic Interests:

Under the CCAA, an interested party may now make an application and the Court may make an order requiring a person to disclose any aspect of their economic interest in a debtor company on any terms that the Court considers appropriate. The CCAA defines economic interest as (i) a claim, an eligible financial contract, an option or a mortgage, hypothec, pledge, lien, or any other security interest; (ii) the consideration paid for any right or interest (including those noted above); and (iii) any other prescribed right or interest. In making an order for disclosure of information, the Court is to consider (i) whether the monitor approved the proposed disclosure, (ii) whether the disclosed information would enhance the prospects of a viable compromise or arrangement being made in respect of the debtor company; and (iii) whether any interested person would be materially prejudiced as a result of the disclosure.

Intellectual Property Changes:

The BIA and CCAA amendments have expanded the existing intellectual property protections to BIA proposals, receiverships, and CCAA proceedings. In particular, users of intellectual property will still have rights to the intellectual property even when the intellectual property is sold in an insolvency proceeding.

We will have to wait and see how the Courts will interpret and apply the BIA and CCAA amendments.

If you have any questions or would like information on changes to the BIA and CCAA, contact Samantha Bogoroch at sbogoroch@mindengross.com.

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