Introduction to the Canadian Bankruptcy Reforms
Thank you for the introduction Bob. I am delighted to have the opportunity to Guest Blog this week about the Canadian bankruptcy reforms.
On Friday September 18, 2009, the remaining amendments contained in Chapter 36 of the Statutes of Canada, 2007, and Chapter 47 of the Statutes of Canada, 2005 (c.36 and c.47) came into force: http://www.gazette.gc.ca/rp-pr/p2/2009/2009-08-19/html/si-tr68-eng.html. The coming into force of these amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) brings to a close a long, frustrating, and confusing reform process. While there are a number of promising components in the reforms, there is still much that could have been done. Hopefully we (academics) won’t lose steam in pushing for future reforms and the regulators won’t feel that their work is done. In today’s post, I’ll restrict my comments to background on the reforms and the process. In the next post, I’ll briefly highlight the key consumer bankruptcy reforms. For the last three posts I’ll offer a critical analysis of the consumer bankruptcy reforms. Outside of the references to the commercial reforms in this post I will not focus on them this week, as time does not permit me to do a thorough job on both consumer and commercial reforms. That being said there are significant commercial reforms that will have an impact on consumers, in particular the labour reforms.
Background to the Current Reforms
Canada is currently at the end of what has been described as the third major phase of bankruptcy reform since our first federal bankruptcy legislation was enacted in 1919. This phase began roughly in 2002. The 1997 amendments had called for a further parliamentary review of the legislation in 5 years time, which was the genesis for the current reforms. Three key reviews took place. In 2000, the Superintendent of Bankruptcy established the Personal Insolvency Task (PITF) Force, which produced a report in 2002: http://strategis.ic.gc.ca/epic/site/bsf-osb.nsf/en/br01285e.html. The Insolvency Institute of Canada and the Canadian Association of Insolvency Professionals formed a Joint Task Force to report to government on business insolvency reform and this report was completed in March 2002: http://www.insolvency.ca/dhtml/en/page/papers.q/indexType$Topic/indexID$10/a$index.html. Finally, the Standing Senate Committee on Banking, Trade and Commerce, charged with carrying out the parliamentary review mandated by the 1997 amendments, held hearings during 2003 and released its report in November of that year: http://www.parl.gc.ca/37/2/parlbus/commbus/senate/com-e/bank-e/rep-e/bankruptcy.pdf. The commercial recommendations drew heavily from the Joint Task Force report and the consumer recommendations drew in part on the PITF report.
Bill C-55 to Statute C-47
Bill C-55 – aimed at implementing the Senate Report’s key recommendations – was given first reading on June 3, 2005. The Bill was widely criticized for technical as well as broader reasons, including a lack of consultation. It was referred for review to the House of Commons; however, hearings were terminated not long after they started and the Bill was rushed through parliament at the end of the federal Liberal government. [A quick side note for American readers – the federal Liberal party had just lost power to the Conservative party]. The Senate was confronted with a difficult choice as to whether to oppose or support legislation that was described as both very important and very problematic. It was important because it contained many amendments to the existing legislation, especially a complex regime of wage earner protection that would provide for payment of unpaid wages to workers whose employer had gone into bankruptcy—a most welcome and socially desirable initiative. It was problematic because it contained a number of serious flaws that needed to be addressed before it came into force. Accordingly, the Senate agreed to let Bill C-55 through unchanged based on a commitment from the government of the day that the legislation would not be proclaimed into law until at least June 2006, so that further amendments could be made. Bill C-55 received Royal Assent on November 25, 2005 and following its enactment became Chapter 47.
Bill C-62 to Statute C-36
On December 11, 2006, a Ways and Means motion to amend C-47 was tabled. The Ways and Means motion was left on the Parliamentary order paper but the Bill that was attached to it reappeared with one change as Bill C-62 in June 2007. The delay was the result of opposition to the provisions dealing with the treatment of Registered Retirement Savings Plans. The Bill was passed at Third Reading by the House of Commons on June 14, 2007 and received First Reading in the Senate on the same day. However, the Bill died when Parliament was prorogued on September 17, 2007, ending that Session of Parliament.
In October of 2007, the government introduced Bill C-12, an exact copy of the previous Parliamentary session’s Bill C-62. In December, 2007, the Senate approved Bill C-12 without subjecting it to scrutiny in the form of hearings and the Bill received Royal Assent on December 14, 2007. Following its enactment it became Chapter 36. Parts of c.36 and c.47 came into effect on July 7, 2008, but the bulk of the amendments came into effect on Friday September 18, 2009.
There was very little opportunity for hearings or consultation involving a wide range of stakeholders in this reform process. However, when we thought there would be an opportunity for hearings that would impact the reforms that were going to be enacted, a group of law professors put together submissions to the Standing Senate Committee on Banking Trade and Commerce. Professors Tony Duggan and Jacob Ziegel (from the University of Toronto Law School) representing the group did have an opportunity to present this submission to the Senate committee, but it was at a point where it was clear that it would not impact the substance of this set of reforms.
While we agreed with a number of the reforms, given the limits on space here, the following is an excerpt of what we disagreed with:
 We disagree with the implementation of many of the above measures in their existing format either on policy grounds or because of ambiguities or other drafting difficulties. In particular,
a. With respect to the Wage Earner Protection Program Act, we believe that claims on the Wage Earner Protection Programme should be met not out of the Consolidated Revenue Fund, as is provided, but out of a newly created self-financing insurance fund or, preferably, out of an enlarged Canada Employment Insurance Programme);
b. With Respect to the Commercial Insolvency Provisions, we are concerned about the duplication of many of the new provisions in the BIA and CCAA and believe it to be unnecessary.
 We have particular concerns about the provisions governing:
a. the disclaimer, affirmation and assignment of executory contracts;
c. transfers at undervalue;
e. adoption of the UNCITRAL Model Law on cross-border insolvencies; and
f. the subordination of equity claims and treatment of equity claims for voting purposes. (BIA s.140.1, CCAA s.618) and 22.1).
 We also believe that there is no longer any justification for a separate CCAA and that the provisions that are special to and appropriate to the reorganization of large insolvent entities can be accommodated in a revised BIA, just as has been done in the British and US insolvency legislation.
 With respect to the CCAA Amendments, we oppose on grounds of principle:
a. the Court’s power under the CCAA’s new s.11 to make “any” order it sees fit in relation to the proceedings that the Court “considers appropriate in the circumstances;” and
b. the power to remove a director from the debtor corporation’s board if the court is satisfied that the director “is unreasonably impairing or is likely to unreasonably impair the possibility of a viable compromise” (CCAA s 11.5).
 Consumer Insolvency Provisions. We are opposed to the following provisions in Statute c.47:
a. Proposed new s.168.1(ii) postponing from 9 months to 21 months a consumer bankrupt’s entitlement to an automatic discharge where the debtor has surplus income and regardless of the size of the surplus;
b. Giving trustees the power to enforce surplus income payment obligations against exempt property of the debtor;
c. Permitting trustees to enter into enforceable fee contracts with indigent consumer bankrupts who have no surplus income and making such contracts enforceable even after the debtor’s discharge; and
 We are concerned about the exclusion from Statute c.47 of the following recommendations in the PITF Report (recommendations that were also endorsed in the Senate Committee’s Report of November 2003):
a. an optional federal list of property exempt from the trustee’s reach that may be invoked by bankrupt individuals;
b. avoidance of non-purchase money security interests in exempt consumer goods given by a bankrupt debtor;
c. regulation of express and implied reaffirmation of a debtor’s pre-bankruptcy obligations after the bankrupt’s discharge or completion of the terms of a consumer proposal.
 We are also concerned about the amending legislation’s failure to address the following significant consumer issues:
a. the conflict of interests to which trustees are regularly exposed in seeking to serve the interests of both debtors and the debtors’ creditors;
b. the absence of low cost simple bankruptcy and discharge facilities for indigent debtors without surplus income;
c. removal of the terminological stigma attaching to the word “bankrupt” when applied to individual debtors resorting to liquidation insolvency proceedings under the BIA;
d. the failure to recognize that the easy availability of consumer credit to most Canadians and a general consumption culture are substantially responsible for Canada’s record high consumer insolvency rates and, consequently, the amending legislation’s failure;
e. to require the credit industry to absorb a higher share of the cost of administering consumer insolvencies and providing assistance to insolvent individuals;
f. to require the credit industry to adopt much stronger measures to prevent consumers from over-committing themselves; and
g. to ensure that consumer representatives, academics knowledgeable in these areas and other qualified independent individuals, are included as advisors in the drafting and administration of the consumer insolvency provisions of the BIA and other federally administered legislation and in the drafting of directives by the Superintendent of Bankruptcy under the BIA.
I will pick up on a number of these issues in my final two posts.