Focus On Insolvency - September, 2009

If you have any questions or would like further information on

these Amendments to the CCAA and BIA, please contact one of the

following members of our

Insolvency, Bankruptcy and Restructuring Group.

SUMMARY OF AMENDMENTS TO THE CCAA AND BIA

On September 18, 2009, amendments (the "Amendments")

to the Companies' Creditors Arrangement Act (the

"CCAA") and Bankruptcy and Insolvency

Act (the "BIA") came into force.

The CCAA Amendments are applicable to all entities

which commence proceedings under the CCAA on or after

September 18, 2009. The BIA Amendments are applicable to

all persons that become bankrupt, file a notice of intention or a

proposal, or have an interim receiver or receiver appointed in

respect of all or part of that person's property on or after

September 18, 2009.

The following is a summary of the major changes, excluding those

changes relating to consumer bankruptcy and proposals, that have

resulted from the coming into force of the Amendments.

These changes are the combined result of the following two

pieces of legislation:

Chapter 47 of the Statues of Canada, 2005: "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" (previously Bill

C-55); and

Chapter 36 of the Statues of Canada, 2007: "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

Statues of Canada, 2005" (previously Bill C-12).

Certain of the Amendments, specifically those with respect to

the Wage Earner Protection Program Act, 2005, c. 47, s.1,

were proclaimed in force on July 7, 2008. On July 30, 2009 the

Governor General in Council announced that the remaining Amendments

were to come into force on September 18, 2009, with the exception

of a few minor provisions.

CHANGES TO CCAA/BIA

Approval of Plans of Arrangement or Compromise and

Proposals

The Amendments significantly alter the existing case law and

corresponding practice by stipulating that the Court may only

sanction a plan under the CCAA or a proposal under the

BIA, if the plan or proposal includes a provision for the

payment of certain wage and pension-related amounts.

Pursuant to the Amendments, employees are to receive (i) the

amounts they would have been entitled to receive under the

BIA if the debtor company had gone bankrupt (being up to a

maximum of $2,000 for services provided in the six months prior to

the date of the initial bankruptcy event (explicitly excluding

termination and severance pay)); and (ii) amounts owing for

services rendered after the commencement of the CCAA or

proposal proceedings (however, no explicit exclusion for

termination or severance pay is provided).

Should employees be terminated post-filing, it is therefore not

clear if full payment of termination and severance amounts would be

required to be paid to such employees upon the approval of the

plan/proposal or only that portion which arose post-filing through

their continued employment.

If the debtor company participates in a prescribed pension plan,

the debtor company must provide, as a term of its plan or proposal,

for the payment to the pension fund of an amount equal to the sum

of all amounts that were deducted from the employee's

remuneration for payment to the pension fund and amounts which were

required to be paid by the employer to the pension fund, unless the

parties to the pension plan have entered into an agreement,

approved by the relevant pension regulator, respecting payment of

these amounts.

Asset Sales

While the CCAA did not previously contemplate asset

sales, existing CCAA case law does permit the sale of

assets outside of the ordinary course of business and outside of

the filing of a plan. Similarly, asset sales outside of the

ordinary course were not previously contemplated where a notice of

intention to file a proposal ("NOI") or a proposal has

been filed.

The Amendments codify existing case law, but also include

detailed provisions regarding the sale of assets to related parties

and prohibit the Court from approving a sale unless the debtor

company can and will make certain employee and pension

payments.

The new provisions apply to all asset sales and there is no

threshold amount under which the provisions do not apply. This is a

change from past practice where initial orders granted in

CCAA proceedings generally included a provision allowing

asset sales by the debtor company under a certain value to be

completed without prior Court approval.

The Court may only approve a sale of assets if it is satisfied

that the debtor company can and will make the payments that would

have been required for unpaid wages and unpaid pension plan

contributions if the Court had sanctioned the plan or proposal.

These sections do not specifically exclude post-filing severance

and termination amounts owing to employees.

Also, if the proposed sale is to a related person, the Court may

only approve the sale if it is satisfied that good faith efforts

were made to sell the assets to non-related persons and the

consideration to be received is superior to the consideration that

would have been received under any other offer.

Assignment of Agreements

The Amendments provide the Court with the ability, in certain

circumstances, to order an assignment of an agreement between a

third party and a debtor company without the required consent of

the counterparty to the agreement. These changes are applicable in

a proposal or CCAA proceeding, or if a receiver has been

appointed.

The new explicit authority granted to the Court represents a

substantive change to the CCAA and BIA and it is

uncertain how these sections will be interpreted.

While the CCAA does not currently provide for the

assignment of agreements, case law does exist where assignments

have been ordered by the Court over the objection of the

counterparty whose consent was required under the terms of the

agreement. This has not, however, been common practice.

The Court is not authorized to order the assignment of certain

agreements, namely those which; (i) are not assignable by their

nature (i.e. personal service contracts), (ii) were entered into on

or after the CCAA or BIA proceedings were

commenced, (iii) are eligible financial contracts, or (iv) are

collective agreements. The Court may not order an assignment unless

it is satisfied that all monetary defaults in relation to the

agreement will be remedied; such defaults do not include those

arising by reason only of the debtor company's insolvency, the

commencement of CCAA or BIA proceedings, or

non-monetary obligations.

When determining whether or not to order the assignment, the

Court will consider whether:

the monitor or proposal trustee (if the order is sought in a

proposal proceeding) approved the proposed assignment;

the proposed assignee would be able to perform the obligations

under the agreement; and

it would be appropriate to make the assignment.

Disclaimer of Agreements

The CCAA did not previously provide for the disclaimer

of agreements and the BIA did not provide for the

disclaimer of agreements (other then leases). Historically however,

the Courts have permitted debtor companies to disclaim agreements

and deal with the consequences thereof in the plan or proposal.

The past flexibility of disclaiming agreements is somewhat

narrowed by the Amendments, which provide that the debtor company

may disclaim any agreement, provided the monitor or trustee

approves of the proposed disclaimer. The counterparties to the

agreements to be disclaimed are also provided a process to object

to the disclaimer.

Should the monitor or trustee not provide its consent to the

disclaimer, the debtor company may apply to the Court for an order

disclaiming the agreement. Similarly, a party whose agreement has

been disclaimed under this provision may apply to the Court for an

order that the agreement should not be disclaimed.

When deciding whether or not to make such orders, the Court

shall consider a variety of factors, including whether:

the monitor or trustee has approved the disclaimer;

the disclaimer would enhance the prospect of a viable

restructuring or proposal being made; and

the disclaimer would cause significant financial hardship to a

party to the agreement.

Any loss suffered by a party pursuant to a disclaimer is

considered to be a provable claim.

The debtor company's ability to disclaim agreements do not

extend to eligible financial contracts, collective agreements,

financing agreements if the debtor company is the borrower, or

leases of real property or of an immovable if the debtor company is

the lessor. Similarly, a disclaimer of an agreement does not affect

a counterparty's right to use intellectual property for which

it has been granted a right to use by agreement.

Collective Agreements

Under past practice there was some uncertainty as to whether the

Court had the power to amend a collective agreement. The Amendments

make it clear that neither the debtor company, nor the Court, have

such power.

While the debtor company is not unilaterally able to amend a

collective agreement, under the new provisions, the debtor company

is able to apply to the Court for an order authorizing it to enter

into negotiations with the applicable bargaining agent pursuant to

a "notice to bargain." Should the Court be satisfied that

renegotiations are necessary and grant the order, and the parties

to the collective agreement subsequently agree to revise the

collective agreement, the bargaining agent will have a claim as an

unsecured creditor for the value of any concessions it has made

under the collective agreement.

Once the debtor company has been authorized by the Court to

serve a "notice to bargain", the responding bargaining

agent may apply to the Court for an order...