Financial Recovery Articles
Money Troubles? Bill C-55 May Offer Relief for Owner-Managers
Business Times
April 2006
With the federal government’s recent introduction of a sweeping insolvency reform package, owners of financially stressed businesses may have more tools available to restructure operations.
Last June, the government of Canada introduced Bill C-55 to modernize the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA), and to establish the Wage Earner Protection Program Act.
The legislation is long overdue. It’s been nine years since the last comprehensive reform of insolvency legislation in this country. Bill C-55 received Royal Assent during November 2005 and, pending further review and possible amendments by the Senate, may be proclaimed into force sometime after June 2006.
This bill continues the government’s emphasis on encouraging restructurings rather than bankruptcies or liquidations. The reforms, which cover both business and consumer insolvency legislation, are also intended to increase the fairness and to reduce abuses of the insolvency system as well as to improve its administration.
Following are the highlights of the legislation related to restructurings of commercial enterprises that offer relief for business owners.
- The Court would be able to authorize interim financing to a debtor company during a restructuring process, whether under the BIA or the CCAA. The interim lender may receive a priority ranking over the company’s assets for the interim financing ahead of secured lenders. This may assist in allowing more companies to continue operations and complete a successful restructuring.
- The Court would be able to issue a priority charge to indemnify directors and officers for their roles in a restructuring. This would ensure that directors and officers don’t “abandon ship” once a company initiates restructuring plans. The priority charge would protect directors and officers from liabilities that may arise after the commencement of a formal restructuring. At the same time, if directors present a barrier to a successful restructuring, the new provisions would allow the Court to remove and replace such directors.
- The Court would also be able to issue a priority charge for the payment of professional costs associated with a restructuring. This would include the remuneration and expenses of any financial, legal, or other experts engaged by the company, including the trustee in a proposal under the BIA or the monitor of a plan under the CCAA.
- A company would be able to terminate certain contracts (such as supply contracts or sales contracts) if this is necessary for the success of a proposal or restructuring plan. This excludes eligible financial contracts (e.g. derivative and futures contracts), financing agreements where the company is the borrower, a collective agreement, or intellectual property licenses where the company is the licensor. Where a contract is disclaimed, the other party has an unsecured claim for its losses.
- Similarly, a company would be able to assign certain contracts, with the Court’s approval, to third parties. This might apply in situations where, for example, a company has a profitable sales contract but is experiencing difficulties in meeting the contract obligations. Rather than losing the contract, a company could “sell” the contract and obtain some value in doing so.
- The concept of a “critical supplier” would be available for restructurings under the CCAA. Where an existing supplier is critical to the continued operation of a reorganizing company, the Court could declare the supplier to be a “critical supplier.” As such, the Court could require the supplier to continue supplying goods or services. In exchange, the Court would grant a security or charge in favour of the supplier over the company’s assets to the extent of the value of goods or services to be provided, which may rank in priority to existing secured creditors’ charges.
- No party would be able to terminate or amend an agreement (such as a lease or a supply agreement) with an insolvent company for the mere reason the company filed for protection under the BIA or CCAA as part of a restructuring.
- If, in a BIA or CCAA restructuring, a company made good faith efforts to renegotiate a collective agreement with the bargaining agent representing its employees, but was not successful, it would be able to apply to the Court to serve a “notice to bargain” on the agent. If the collective agreement was subsequently revised, the agent could make an unsecured claim for the value of any concessions.
If your business is facing a serious financial situation, seek the professional advice of a chartered insolvency and restructuring professional. If Bill C-55 is implemented in its current form, there may be opportunities to utilize certain provisions to your advantage – and restructure your company back into a healthy financial position.
Eugene P. Migus, CA•CIRP is a senior vice-president of BDO Dunwoody Limited (www.bdo.ca). BDO works with financially stressed clients to implement creative restructuring strategies. You can reach Eugene at (905) 615-6201 or emigus@bdo.ca.
