Bill C-55: clause by clause analysis (cl00790)

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

Wage Earner Protection Program Act (WEPP)

Bankruptcy and Insolvency Act (BIA)

Companies' Creditors Arrangement Act (CCAA)

Consequential Amendments to Other Acts and coordinating Amendments Clauses of Bill C-55: 136-140

Coming into force Clauses of Bill: 141

WEPP: Title and Definition

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 1
• Bill Clause No. 1 - WEPP Section 2(1)
• Bill Clause No. 1 - WEPP Section 2(2) and 2(3)
• Bill Clause No. 1 - WEPP Section 3
• Bill Clause No. 1 - WEPP Section 4

Bill Clause No. 1
Section No. 1
Topic: Short Title

Proposed Wording

1. This Act may be cited as the Wage Earner Protection Program Act.

Rationale

This provision provides the short title of the Act.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 2(1)
Topic: Interpretation

Proposed Wording

2. (1) In this Act, "wages" includes salaries, commissions, compensation for services rendered, vacation pay and any other amounts prescribed by regulation but does not include severance or termination pay.

Rationale

The policy rationale of this section is to:

• ensure consistency between the wages protected by the Program and the wages protected by the Bankruptcy and Insolvency Act (BIA): and
• exclude severance and termination pay from coverage by the Program.

Consistency between the Program and the BIA:

This section defines the scope of wages protected by the Program. It matches the definition of wages covered by the proposed "limited super priority" (in the Bankruptcy and Insolvency Act, s. 81.3 and 81.4, contained in clause 67, sections 81.3 and 81.4 of the Bill) and the "preferred creditor status" (in BIA, s. 136(1)(d)). This facilitates cost recovery of the program (because government will be able to take the wage earner's place and make claims against the bankrupt employer) and ensures consistency between the BIA and the WEPP Act. The regulation-making power provided will allow the definition of wages to be broadened to include salespersons' expenses (which are also protected by the limited super priority and the preferred creditor status.)

Exclusion of severance and termination pay:

The definition deliberately excludes termination and severance pay to serve the policy objective of the WEPP: protecting core wages of workers. The amounts of severance and termination owing could be quite high, and would vary dramatically among individual workers (varying with level of seniority), and among provinces (with different statutory minima concerning termination and severance pay), and among workplaces (as enhanced termination or severance benefits - over and above statutory minima - may be offered by individual employers). Including severance and termination pay would also dramatically increase the amounts paid out by the WEPP.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 2(2) and 2(3)
Topic: Interpretation

Proposed Wording

2. (2) For the purposes of this Act, an employer is subject to a receivership when any property of the employer is under the possession or control of a receiver.

(3) In this Act, "receiver" means a receiver within the meaning of subsection 243(2) of the Bankruptcy and Insolvency Act.

Rationale

These provisions define the receivership situation which is covered under by the WEPP to include receiverships falling within the provisions of Bankruptcy and Insolvency Act (BIA). (To see provisions in the Bill pertaining to receiverships falling within the mandate of the BIA, refer to clause 115 of the Bill).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 3
Topic: Designation Of Minister

Proposed Wording

3. The Governor in Council may designate a member of the Queen's Privy Council for Canada to be the Minister for the purposes of this Act.

Rationale

These sections provide that the Minister responsible for the administration of this Act can be appointed by Order in Council.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 4
Topic: Program Established

Proposed Wording

4. The Wage Earner Protection Program is established to make payments to individuals in respect of wages owed to them by employers who are bankrupt or subject to a receivership.

Rationale

This section authorizes the establishment of the program and sets out its scope (protecting wages owed to workers when employers are bankrupt or subject to receivership).

Present Law

Not applicable.

WEPP: Eligibility for payments

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 5
• Bill Clause No. 1 - WEPP Section 6

Bill Clause No. 1
Section No. 5
Topic: ELIGIBILITY FOR PAYMENTS

Proposed Wording

5. An individual is eligible to receive a payment if

(2) An individual is ineligible to receive a payment in respect of any wages earned during a period in which the individual

• (a) the individual's employment with an employer was terminated, within the meaning of the regulations;
• (b) the former employer is bankrupt or subject to a receivership;
• (c) the individual is owed wages by the former employer; and
• (d) the wages that are owed were earned during the six months immediately before the date of the bankruptcy or the first day on which there was a receiver in relation to the former employer.

Rationale

This section is intended to establish eligibility criteria for program applicants.

Termination of employment:

This provision is meant to ensure that WEPP payments are targeted to individuals who have lost their jobs following the insolvency of their employer in order to meet the policy intent of the WEPP - filling a gap in the system between the loss of earnings and the loss of employment (which triggers eligibility for Employment Insurance (EI)). This precludes the possibility of paying wages for those workers who continue to be employed by a receiver before being terminated. However, once termination occurs, wage earners will become eligible for payments.

The power to define termination in section 5(a) will be set out in regulation in order to ensure that a consistent definition of termination is used in all jurisdictions. Termination of employment is defined in each provincial and federal labour statute, and each statute defined "termination" in a way that contrasts it with the concept of the "lay-off" - a separation of employment with a set day of recall, or a high likelihood of recall. The distinction is important for the purposes of labour legislation because termination from employment triggers a duty for employers to provide their employees with notice of termination, or to provide payment of wages in lieu of notice of providing the required amount of notice of termination. However, in many cases, a lay-off may be very lengthy, or the promise of recall is not met, which creates a need to trigger the employee's entitlements related to their termination from employment in order to preserve fairness in the employment relationship. Consequently, each labour statute provides that, if a lay-off lasts for a certain period of time, it will be considered a termination from employment. The definition of termination of employment varies by labour jurisdiction in Canada. However, since the WEPP will operate in every labour jurisdiction, it is desirable - for the purpose of providing consistent and fair administration of the Program for all claimants - to ensure that there is a consistent definition of "termination of employment" for all WEPP claimants, and to ensure that any WEPP claimant who is laid off for a substantial period of time will be eligible.

Coverage of bankruptcies and receiverships:

Bankruptcies and receiverships are covered by the WEPP because, in these situations, there are often insufficient assets available from the estate of the bankrupt or insolvent employer to cover unpaid wage claims. Moreover, insolvency proceedings are often lengthy, and unpaid wage earners receive payment of their wage claims only after lengthy delays - if at all. The WEPP is designed to rebalance the insolvency system in order to better protect workers, who are among the most vulnerable stakeholders.

Walk-aways (situations in which indebted businesses cease operating without recourse to the insolvency process) are not covered because:

• doing so would leave the program more vulnerable to abuse (by employers who may close down without paying wages owing, have workers qualify for the WEPP, and resume business at a later time). Bankruptcies and receiverships provide a deterrent to such activity, because the assets of the debtor-business would be seized, making the subsequent start-up of the business less likely; and
• enforcement of unpaid wage claims under labour laws can continue in the walk-away situation while such measures are stayed in receiverships and bankruptcies.

Eligibility limited to wages owed in the six months prior to bankruptcy and receivership:

This provision is designed to match provisions of the Bankruptcy and Insolvency Act (BIA), which provides that unpaid wages that are owing for the six months preceding the bankruptcy or receivership of the employer are covered by the "limited super priority" (proposed in clause 67, sections 81.3 and 81.4 of the Bill) and the "preferred creditor" status set out in section 136(1)(d) of the BIA. This will ensure that it is easier to administer the WEPP (by facilitating the process in which the Program will be subrogated to the employee's claim against the bankrupt estate, as set out in section 36 of the Act; refer to clause 1, section 36). It will also provides a balance between the need to ensure that unpaid wage earners - who may go through long periods of working without receiving wages - are protected, without providing an incentive for unpaid wage earners to continue to work without receiving wages for an indefinite period of time.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 6
Topic: ELIGIBILITY FOR PAYMENTS

Proposed Wording

6. (1) An individual is ineligible to receive a payment if, at the date of his or her former employer's bankruptcy, or the first day on which there was a receiver in relation to the former employer, the individual had been employed by the former employer for a period of three months or less or, in relation to any category of wage earners specified by the regulations, any shorter period specified in the regulations.

(2) An individual is ineligible to receive a payment in respect of any wages earned during a period in which the individual

• (a) was an officer or a director of the former employer;
• (b) had a controlling interest, within the meaning of the regulations, in the business of the former employer; or
• (c) occupied a managerial position, within the meaning of the regulations, with the former employer.

Rationale

Excluding employees with less than three months' experience:

Section 6(1), which restricts the eligibility of workers with less than three months' experience, is designed to address potential abuse of the program. Employers may hire workers in the period leading up to their insolvency without intending to pay those workers, on the understanding that the WEPP would pay them. However, provisions can be made through regulations to exempt certain workers in special circumstances, particularly workers with limited (or determinant) tenure - such as seasonal workers, temporary workers or students - from the three month restriction. This strikes a balance between the need to deter abuse of the program and the need to be flexible to meet the needs of workers in a variety of situations. For a discussion of the policy intent that will inform this regulation, please refer to the discussion of section 41(1)(c) of the WEPP Act, below.

Excluding corporate directors, "controlling" owners and certain managers:

Section 6(2) is intended to prevent abuse of the WEPP by excluding individuals from receiving WEPP payments who (i) would have had privileged information on the financial situation of the company and who may forego payments for themselves knowing they would receive payment from the WEPP; and/or (ii) bear responsibility for the insolvency of the business. These individuals are ineligible as it would be perverse to compensate individuals who bear responsibility for the insolvency of the business and who may be responsible for incurring liabilities for unpaid wages (which constitutes a violation of labour or employment standards legislation in all jurisdictions).

Present Law

Not applicable.

WEPP: Amounts covered

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 7(1)
• Bill Clause No. 1 - WEPP Section 7(2)

Bill Clause No. 1
Section No. 7(1)
Topic: AMOUNTS COVERED BY PROGRAM

Proposed Wording

7. (1) The amount that may be paid under this Act to an eligible individual is the amount of wages owing to the individual that were earned in the six months immediately before the date of bankruptcy or the first day on which there was a receiver in relation to the former employer less any deductions applicable to the payment under a federal or provincial law.

Rationale

Excluding employees with less than three months' experience:

This section enables the Program to cover a wage claim to include unpaid wages incurred any time in the six months preceding the bankruptcy or receivership of the employer. The Program protects six months wages in the period leading up to the bankruptcy or receivership (in order to match the period in which wages are protected under the proposed "limited super priority" proposed in sections 81.3 and 81.4 of the BIA - set out in Clause 67 of this Bill - and the "preferred creditor status" under section 136(1)(d) in the BIA). This will ensure that it is easier to administer the Program (by facilitating the process in which the Program will be subrogated to the employee's claim against the bankrupt estate, as set out in section 36 of the Act; refer to clause 1, section 36). The six month period will also allow employees who work irregular hours for the business - and who may not have worked in the period immediately preceding the bankruptcy or receivership - to be eligible for payment, if they have unpaid wage claims that significantly predate the insolvency of the employer. It will also provides a balance between the need to ensure that unpaid wage earners - who may go through long periods of working without receiving wages - are protected, without providing an incentive for unpaid wage earners to continue to work without receiving wages for an indefinite period of time.

These amounts will be subject to any source deductions required by law (refer to section 7(2) of the Act; clause 1, section 7(2) of the Bill).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 7(2)
Topic: AMOUNTS COVERED BY PROGRAM

Proposed Wording

7. (2) The maximum amount that may be paid under this Act to an eligible individual in respect of any particular bankruptcy or receivership is the greater of

• (a) $3,000, and
• (b) an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act;

less any deductions applicable under a federal or provincial law.

Rationale

The limit on the amount of wages covered is set according to the amount of maximum insurable earnings under the EI Act, for a four week period (maximum insurable earnings for one week is $750; for a four week period, the maximum is currently $3,000).

The amount is pegged to EI insurable earnings for a four-week period on the assumption that the longest a worker would continue to work without pay would be two pay periods of two weeks. This will ensure that the maximum amount of coverage will increase with the maximum insurable earnings in the EI program, which will ensure that benefits increase in line with wage levels and cost of living and to provide congruency between the Government of Canada's income security programs. Moreover, the maximum amount of payment from the WEPP corresponds with the maximum insurable earnings under the EI program as this amount closely approximates the average (mean) industrial wages of a full-time worker in 2004 (which, according to the Labour Force Survey, was $777.73).

The $3,000 limit is sufficient to cover virtually all claims for wages and vacation pay, as it is estimated that 97% of unpaid wage claims in cases of receivership and bankruptcy are less than $3,000.

The section clarifies that WEPP payments are wages and are subject to deductions required under federal and provincial laws, to ensure equity between WEPP claimants and other workers.

Present Law

Not applicable.

WEPP: Application for payments

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 8
• Bill Clause No. 1 - WEPP Section 9,10

Bill Clause No. 1
Section No. 8
Topic: APPLICATION FOR PAYMENT

Proposed Wording

8. To receive a payment, an individual must apply to the Minister in the form and manner, and within the period, provided for in the regulations.

Rationale

This provision establishes - along with sections 9 and 10 - the role of the Government of Canada as the administrator of the Program, in order to delineate the responsibilities of the program administration from other individuals or bodies that are concerned with unpaid wage claims in bankruptcies and receiverships (e.g. insolvency professionals, whose roles and responsibilities are set out in section 21 of the WEPP Act, contained in clause 1, section 21 of this Bill.)

• Allowing the legal framework that supports the application process to be set in regulations will allow the application process and the supporting legal framework to be developed concurrently.
• Allowing the legal framework for the application process to be set in regulations (rather than in the text of the Act itself) will simplify the process of fine-tuning the application process as the Program is implemented (in order to allow any improvements in the application process which may become apparent as the Program is being implemented).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 9,10
Topic: APPLICATION FOR PAYMENT

Proposed Wording

9. If the Minister determines that the applicant is eligible for a payment, the Minister must approve the making of the payment.

10. The Minister must inform the applicant of the Minister's determination.

Rationale

Though information on the identity of WEPP claimants and the amounts of their claims will be produced by insolvency professionals under section 21 of the Act (see Clause 1, section 21 of the Bill), ultimate responsibility for determining the amount of each entitlement to the WEPP will lie with the Minister (or designate). This will ensure accountability as the Minister will be responsible for the administration of the Program.

Furthermore, section 11 re-enforces the responsibility of the Minister for the administration of the Program, and clearly establishes the program administrator as the point of contact for the purpose of processing applications (rather than other organizations or individuals involved, such as insolvency professionals or labour law enforcement officials.)

Present Law

Not applicable.

WEPP: Review and Appeal

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 11, 12 and 13
• Bill Clause No. 1 - WEPP Section 14, 15, 16, 17, 18, 19 and 20

Bill Clause No. 1
Section No. 11, 12 and 13
Topic: REVIEW AND APPEAL

Proposed Wording

11. An applicant who is the subject of a determination may, in accordance with the regulations, request a review of the determination.

12. After considering the request for a review, the Minister may confirm, vary or rescind the determination.

13. Subject to the right of appeal under section 14, the review decision is final and may not be questioned or reviewed in any court.

Rationale

This section sets out a mechanism for decisions of the Minister on WEPP claims to be reviewed.

Scope of the review:

The review occurs strictly on issues of fact. The purpose of the review is to detect errors that occur in the administration of the Program in order to:

• enhance fairness for WEPP claimants, who may not have received their full entitlement; and
• promote efficiency in the administration of the Program, as the detection of errors will allow steps to be taken to reduce their occurrence.

Issues of jurisdiction, or the interpretation of the Act or its regulations, are addressed in the appeal process, set out in sections 14 to 20 of the WEPP Act (see clause 1, sections 14 to 20 of the Bill.)

Procedures in the review process:

The right to a review is automatic, and the review decision is final and may not be appealed (except on grounds of interpretation of the Act or its regulations, or on a question of jurisdiction).

The review will be undertaken by the administrator of the Program itself; there is no recourse to an outside authority or body to conduct the review process. The program administrator is in the best position to undertake the review because it has the most direct access to the facts and evidence necessary to conduct a full factual review of each application. Moreover, the use of program administration staff to conduct reviews will allow those reviews to be completed more quickly and at less expense than referring the issue to an outside adjudicator or investigator. Finally, the program administrator would face no conflict of interest in undertaking the review; the subject matter of the review is factual and does not address issues of interpretation of the WEPP Act or its jurisdiction. These issues can be addressed through the appeal mechanism, set out in sections 14 to 20 of the Act (refer to clause 1, section 14 to 20 of the Bill, below.)

The Minister has broad powers to acquire information necessary to conduct a thorough investigation and to acquire evidence (see sections 24 to 26). Subject to the right of appeal spelled out in section 14 (see below), the decision of the review is final.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 14, 15, 16, 17, 18, 19 and 20
Topic: REVIEW AND APPEAL

Proposed Wording

14. An applicant may appeal a review decision to an adjudicator only on a question of law or a question of jurisdiction. An appeal must be made in accordance with the regulations.

15. An appeal is to be heard by an adjudicator appointed by the Minister.

16. An appeal is an appeal on the record.

17. After considering an appeal, the adjudicator may confirm, vary or rescind the review decision.

18. The adjudicator must send a copy of his or her decision, and the reasons for it, to each party to the appeal.

19. The adjudicator's decision is final and may not be questioned or reviewed in any court.

20. No order shall be made, process entered or proceeding taken in any court - whether by way of injunction, certiorari, prohibition, quo warranto or otherwise - to question, review, prohibit or restrain an adjudicator in any proceedings of the adjudicator.

Rationale

These sections set a process by which the determinations of the minister can be appealed.

Scope of appeals:

Appeals are limited to questions of "law" or "jurisdiction". In other words, appeals deal with the application and interpretation of the Act. Adjudicators' rulings will provide precedents that will guide future interpretation of the Act and its regulations. Appeals are made "on the record" (s. 16), i.e. based on the facts established in the claim in question, and issues of fact cannot be raised in the appeal.

Questions of fact must be resolved in the "Review" process set out in sections 11 to 13 of the Act (See clause 1, sections 11 to 13 of the Bill, above.) The separation of the "Review" and "Appeal" mechanisms ensures that WEPP claimants have sufficient recourse in the event that they are wrongly denied benefits. It also assures that the appeal and review mechanisms operate in a way that does not impose unreasonable costs and administrative burdens on the Program.

Procedures:

The manner of applying for appeal will be set out in regulations. Appeals will be heard by an adjudicator who is appointed by the Minister but who is not involved in the administration of the WEPP - to ensure fairness and objectivity. The independence of the adjudicator in these cases is critical as the interpretation of the Act, its regulations and its jurisdiction are more controversial than issues of fact, and the WEPP's administrators may be placed in a conflict of interest if they were required to decide such issues.

The adjudicator's decision is final and not reviewable in any court (s. 19), nor can any court restrain an adjudication proceeding (s. 20). The powers of the adjudicator in exercising his or her functions (e.g. summoning witnesses, deciding which parties have standing at the appeal) rest on fundamental principles of administrative law, and are therefore not spelled out in the Act.

Present Law

Not applicable.

WEPP: Role of trustees / receivers

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 21
• Bill Clause No. 1 - WEPP Section 22

Bill Clause No. 1
Section No. 21
Topic: ADMINISTRATION (DUTIES OF TRUSTEES AND RECEIVERS)

Proposed Wording

21. (1) For the purposes of this Act, every trustee and receiver shall

• (a) identify each individual who is owed wages by a bankrupt or insolvent employer, as the case may be, that were earned during the period of six months immediately before the date of the bankruptcy or the first day on which there was a receiver in relation to the employer;
• (b) determine the amount of wages owing to each individual in respect of that six-month period;
• (c) inform each individual of the existence of the program established by section 4 and the conditions under which payments may be made under this Act;
• (d) provide the Minister and each individual, in accordance with the regulations, with information prescribed by the regulations in relation to the individual and the amount of wages owing to the individual in respect of the six-month period; and
• (e) inform the Minister
  • (i) in the case of a trustee, when he or she is discharged, and
  • (ii) in the case of a receiver, when the receiver has completed his or her duties as receiver.

(2) A trustee or receiver must comply with any directions of the Minister relating to the administration of this Act.

Rationale

This provision sets out the role for trustees and receivers in the administration of the WEPP.

Trustees and receivers who fail to fulfil these obligations may be liable for punishment under section 38(2) of the Act (refer to clause 1, section 38 of the Bill). Most cases in which insolvency professionals fail to comply with these duties will be addressed by the Superintendent of Bankruptcy, who has substantial authority to punish the misconduct of trustees using administrative sanctions. Note also that receivers who are appointed under section 243(2) of the Bankruptcy and Insolvency Act (BIA) will also be subject to these administrative sanctions under a new provision (section 243(4) of the BIA; refer to clause 115(2), section 243(4) of the Bill).

Sections 21(1), (a) to (d):

These duties have been assigned to trustees and receivers as they are most-qualified and are best situated to carry out these responsibilities in the most efficient and cost-effective way. Trustees and receivers bear responsibility for verifying proofs of claim against the estate of the bankrupt or insolvent employers; assessing amounts of wage claims for the purposes of the WEPP is a natural extension of that responsibility. As individuals in possession of the assets of employers, they have access to the documents of employers which are essential to establishing the amounts of unpaid wage claims. Moreover, insolvency professionals have expertise with respect to the management of business records, and they have the authority under the BIA to require relevant assistance from the bankrupt or insolvent employer to assist in establishing unpaid wage claims.

Sections 21(1)(e):

This requirement will facilitate the administration of the WEPP as the Program will have an interest in monitoring the progress of the bankruptcy and receivership proceedings, because the WEPP will subrogate the unpaid wage earner's claim as a creditor to the bankrupt or insolvent employer (see section 36(1) of the Act; clause 1, section 36(1) of the Bill).

Section 21(2):

This will enable the program administration to deal with issues that emerge with the implementation of the Program efficiently and expediently. (The authority of the Minister responsible to issue instructions to trustees and receivers is contained in section 23 of the WEPP Act; refer to clause 1, section 23 of the Bill).

It is important to note that failure to comply with these directives is not considered to be an offence under section 38 of the WEPP Act, in the same way that failing to comply with duties required in section 21(1) is an offence (refer to clause 1, section 38 of the Bill). The reason why failing to comply with directives of the minister is not considered to be a punishable offence is that the content of the directives is not set out in the statute, and holding insolvency practitioners liable for failing to conform with requirements not set out in an Act or its regulations would be patently unfair. However, compliance with the directives would be enforceable through the administrative sanctions available to the Superintendent of Bankruptcy under the provisions of the BIA.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 22
Topic: ADMINISTRATION (DUTIES OF TRUSTEES AND RECEIVERS)

Proposed Wording

22. (1) A trustee or receiver who performs duties for the purposes of this Act may charge reasonable fees and disbursements for the performance of those duties.

(2) The fees and disbursements are to be paid out of the property or estate of the bankrupt or insolvent employer.

Rationale

This section provides for the payment of receivers and trustees for performing duties under this Act.

Remuneration of trustees:

Current provisions of the Bankruptcy and Insolvency Act (BIA) allow trustees to charge their fees and expenses ahead of the claims of all unsecured creditors (under section 136(1)(b)(ii)) - behind only the reasonable funeral expenses of a deceased debtor, and any fees charged by an individual appointed by the Superintendent of Bankruptcy to oversee or administer the bankrupt estate.

Remuneration of receivers:

With respect to receivers who are privately appointed, i.e. are appointed by a secured creditor under a security agreement, the remuneration is either paid directly by the secured creditor who appoints the receiver, or the security agreement allows the receiver to charge fees and expenses on the property that the receiver takes into possession.

With respect to receivers or receiver managers who are appointed under the authority of a court order, the court making the order has discretion to allow the receiver to charge reasonable fees and expenses on the property of the bankrupt employer.

Present Law

Not applicable.

WEPP: Powers of the Minister

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 23
• Bill Clause No. 1 - WEPP Section 24
• Bill Clause No. 1 - WEPP Section 25,26

Bill Clause No. 1
Section No. 23
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

23. (1) The Minister may give directions to trustees and receivers in respect of the performance of their duties under this Act.

(2) A direction given by the Minister is not a statutory instrument within the meaning of the Statutory Instruments Act.

Rationale

This will enable the program administration to deal with issues that emerge with the implementation of the Program efficiently and expediently. (Trustees and receivers will be compelled to comply with these directives under section 21(2) of the WEPP Act; refer to Clause 1, section 21(2) of the Bill).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 24
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

24. (1) For the purposes of the administration of this Act, the Minister may

• (a) summon any person before him or her and require the person to give evidence, orally or in writing, and on oath or, if the person is entitled to affirm in civil matters, on solemn affirmation;
• (b) require any person to provide the Minister with any information or document that the Minister considers necessary; and
• (c) require any person to provide an affidavit or a statutory declaration attesting to the truth of any information provided by the person.

(2) Any person, if designated by the Minister for the purpose, may administer oaths and take and receive affidavits, statutory declarations and solemn affirmations for the purpose of or incidental to the administration of this Act. Every person so designated has, with respect to any such oath, affidavit, declaration or affirmation, all the powers of a commissioner for administering oaths or taking affidavits.

(3) The Minister may, for the purposes of administering this Act, accept any oath administered or any affidavit, statutory declaration or solemn affirmation taken or received by any person who has the powers of a commissioner for taking affidavits and who is an officer or employee of

• (a) a department or other portion of the federal public administration specified in any of Schedules I, IV and V to the Financial Administration Act; or
• (b) a department of the government of a province.

Rationale

This section provides the Minister with the powers necessary to acquire any information required to administer the WEPP, including summoning witnesses and compelling testimony; and requiring individuals to provide documents.

These powers facilitate the administration of the Program in three ways:

• supporting the Minister in undertaking reviews of determinations of WEPP payments, at the request of WEPP claimants who may have been denied their full entitlement (see sections 11 to 14 of the Act; clause 1, sections 11 to 14 of the Bill);
• undertaking audits of past WEPP claims (see section 31 of the Act; clause 1, section 31 of the Bill); and
• investigating offences under the Act (see section 38 of the Act; clause 1, section 38 of the Bill).

Determining entitlement of WEPP applicants and conducting reviews of applications:

These powers may be useful in certain exceptional cases in which an application to the Program is highly controversial, or in cases in which an applicant is dissatisfied with the determination of the Minister and requests a review under section 11 of the Act (see clause 1, section 11 of the Bill).

Undertaking audits of WEPP claims:

The power of the Minister to compel evidence under oath and to require individuals to produce documents will allow audits of past WEPP applications to be conducted efficiently and effectively.

The Minister has the power, under section 31 of the Act, to conduct audits of past applications to the WEPP for periods of up to three years in order to detect over-payments and under-payments; this power is extended to six years if the Minister has reasonable grounds to believe that an application to the WEPP was made on fraudulent grounds (see Clause 1, section 31 of the Bill). The power to audit claims is essential for ensuring the efficient administration of the Program (by detecting errors in its delivery) and ensuring its integrity (by detecting fraudulent activity so that overpayments can be recovered and abuse of the Program can be sanctioned).

Investigating offences under the Act:

The power to compel written and oral evidence is important for the purpose of developing evidence for the purposes of investigating and prosecuting offences committed under the Act.

Offences under the Act are listed in section 38, and include frauds committed against the Program and failure to comply with requirements of the Act (refer to Clause 1, section 38 of the Bill). These provisions are essential for protecting the integrity of the Program as they provide a means to punish (and deter) activity which abuses and defrauds the Program and provide an important tool for ensuring accountability of those who are responsible for the administration of the Program.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 25, 26
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

25. (1) A person designated by the Minister for the purpose may, at any reasonable time, enter any place in which he or she reasonably believes there is any information or document relevant to the administration of this Act and may, in that place,

• (a) inspect any books, records, electronic data or other documents that he or she reasonably believes may contain information that is relevant to the administration of this Act;
• (b) use or cause to be used any computer system to examine any data contained in or available to the computer system;
• (c) reproduce or cause to be reproduced any record from the data in the form of a print-out or other intelligible output;
• (d) take any document or other thing from the place for examination or, in the case of a document, for copying; and
• (e) use or cause to be used any copying equipment to make copies of any documents.

(2) If any place referred to in subsection (1) is a dwelling-house, the designated person may not enter the dwelling-house without the consent of the occupant, except under the authority of a warrant issued under subsection (3).

(3) A judge may issue a warrant authorizing the designated person to enter a dwelling-house subject to the conditions specified in the warrant if, on ex parte application, the judge is satisfied by information on oath that

• (a) there are reasonable grounds to believe that the dwelling-house is a place referred to in subsection (1);
• (b) entry into the dwelling-house is necessary for any purpose related to the administration of this Act; and
• (c) entry into the dwelling-house has been, or there are reasonable grounds to believe that entry will be, refused.

(4) If the judge is not satisfied that entry into the dwelling-house is necessary for any purpose related to the administration of this Act, the judge may, to the extent that access was or may be expected to be refused and that information or documents are or may be expected to be kept in the dwelling-house,

• (a) order the occupant of the dwelling-house to provide the Minister, or a person designated by the Minister for the purpose, with reasonable access to any information or document that is or should be kept in the dwelling-house; and
• (b) make any other order that is appropriate in the circumstances to carry out the purposes of this Act.

26. The owner or person in charge of a place that is entered by the designated person and every person found there must

• (a) give the designated person all reasonable assistance to enable him or her to exercise his or her powers and perform his or her duties; and
• (b) provide the designated person with any information relevant to the administration of this Act that he or she requires.

Rationale

This section provides the Minister (or designate) with the powers necessary to acquire any information required to administer the Program.

The power to enter a dwelling-place is subject to judicial oversight, as the Minister (or designate) would require a warrant to enter a dwelling-place in the event that voluntary access to the dwelling place is refused, and the court may decide to require the occupant of the dwelling-place to produce information in lieu of supplying a warrant.

The purpose of these provisions is to facilitate the administration of the Program by allowing the Minister (or designate) to acquire information relevant to:

Determining entitlement of WEPP applicants and conducting reviews of applications:

The powers provided to the Minister in this section - to enter "any place" and to examine documents and electronic data - will provide the program administration with the tools necessary to acquire any information that may be relevant to determine whether or not an individual is entitled to a payment from the WEPP, and ascertain the full extent of that entitlement. This may be useful in certain exceptional cases in which an application to the WEPP is highly controversial, or in cases in which an applicant is dissatisfied with the determination of the Minister and requests a review under section 11 of the Act (see clause 1, section 11 of the Bill).

Undertaking audits of WEPP claims:

The power of the Minister (or designate) to enter places (including dwellings) and examine documents and electronic data will allow audits of past WEPP applications to be conducted efficiently and effectively.

The Minister (or designate) has the power, under section 31 of the Act, to conduct audits of past applications to the Program for periods of up to three years in order to detect over-payments and under-payments; this power is extended to six years if the Minister (or designate) has reasonable grounds to believe that an application to the Program was made on fraudulent grounds (see clause 1, section 31 of the Bill). The power to audit claims is essential for ensuring the efficient administration of the Program (by detecting errors in its delivery) and ensuring its integrity (by detecting fraudulent activity so that overpayments can be recovered and abuse of the Program can be sanctioned).

Investigating offences under the Act:

The power to enter places (including dwellings) and examine documents and electronic data for the purposes of investigating and prosecuting offences committed under the Act.

Offences under the Act are listed in section 38, and include frauds committed against the Program and failure to comply with requirements of the Act (refer to clause 1, section 38 of the Bill). These provisions are essential for protecting the integrity of the Program as they provide a means to punish (and deter) activity which abuses and defrauds the Program and provide an important tool for ensuring accountability among those who are responsible for the administration of the Program.

Present Law

Not applicable.

WEPP: Powers of the Minister

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 27
• Bill Clause No. 1 - WEPP Section 28
• Bill Clause No. 1 - WEPP Section 29
• Bill Clause No. 1 - WEPP Section 30
• Bill Clause No. 1 - WEPP Section 31
• Bill Clause No. 1 - WEPP Section 32,33
• Bill Clause No. 1 - WEPP Section 34

Bill Clause No. 1
Section No. 27
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

27. Despite section 127 and subsection 139(5) of the Employment Insurance Act, personal information relating to an applicant that is collected or obtained by the Canada Employment Insurance Commission must, if requested by the Minister, be made available to the Minister to determine the applicant's eligibility to receive a payment under this Act.

After the Human Resources and Skills Development Act (Bill C-23) came into force, the wording of this section will be replaced by the following, in which the reference to section 127 of the Employment Insurance Act is omitted (refer to clause 140(2) of this Bill):

27. Despite subsection 139(5) of the Employment Insurance Act, personal information relating to an applicant that is collected or obtained by the Canada Employment Insurance Commission must, if requested by the Minister, be made available to the Minister to determine the applicant's eligibility to receive a payment under this Act.

Rationale

This section allows personal information about Employment Insurance (EI) claimants that is gathered by the EI program to be shared with the Minister for the purposes of administering the Wage Earner Protection Program (WEPP). In particular, information contained in the Record of Employment (ROE), the document that certifies an individual's insurable employment for the purpose of determining EI eligibility, can be shared with the Minister to determine the eligibility of claimants to WEPP payments.

The sharing of information between the EI program and the WEPP administration will promote efficiency in both programs.

• The WEPP and the EI program will need to maintain an information sharing relationship as the payment of WEPP benefits (if it includes amounts for earned but unused vacation pay) will affect the EI benefits of an individual who is receiving both a WEPP payment and EI benefits. (See the Annex attached to this note for a full explanation of the affect WEPP payments may have on EI benefits). Sharing personal information between the two programs will allow EI benefits to be adjusted quickly and easily, thereby preventing the emergence of over-payments of EI benefits which would have to be recovered directly from EI claimants.
• The EI program collects information on the ROE that will be useful in establishing WEPP claims, including confirmation of the WEPP applicant's employment status, their Social Insurance Number (SIN), their wage rates and their hours of work.

The wording of this section changed with the coming into force of the Human Resources and Skills Development Act because this legislation repealed section 127 of the Employment Insurance Act and replaced it with provisions governing the use of personal information for all programs that operate within the mandate of the department - including the WEPP and the EI program.

Present Law

Not applicable.

ANNEX

Why does the EI program "claw back" payments that workers receive from bankrupt employers?

The EI program provides coverage for workers who are unemployed - who are no longer being paid, and who are available for work.

At present, any money which is paid to workers as a result of a separation from employment - including severance, termination, or earned but unused vacation pay owing to the worker for the period leading to the job loss - is "allocated to the claimant's normal weekly earnings". This allocation means that the claimant is deemed to have received the money as earnings up to the equivalent of their normal weekly earnings, for however many weeks that the payment would cover, and the payment of benefits from the EI fund is suspended during that period.

However, if the claimant has received payments that have been allocated and the EI benefits have been suspended, then the claimant can have his or her benefit period extended by the amount of time that the suspension of benefits lasted - if they reach the end of their EI benefit period.

To take an example, if a WEPP claimant - who was also receiving EI benefits - received payment of two weeks of earned but unused vacation pay as part of her WEPP payment, then her EI benefits would be suspended for a two week period. However, if that claimant reaches the end of her EI benefits, then her benefits will be extended by two weeks in recognition of the fact that her EI benefits were suspended for two weeks during her benefit period.

Finally, it is important to note that this EI "allocation" of benefits applies only to amounts of vacation, termination and severance pay. It does not apply to wages that are owing for a period before the separation from employment.

Bill Clause No. 1
Section No. 28
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

28. Personal information that has been collected or obtained by the Minister in the administration of this Act may be disclosed by the Minister to any person or body, to the extent that the disclosure is necessary in order for the Minister to obtain information required for the administration of this Act.

This section is repealed after the coming into force of Bill C-23 - the Department of Human Resources and Skills Development Act (see clause 140(3) of this Bill).

Rationale

The Department of Human Resources and Skills Development Act governs the transmission of personal information from any program operated by that department to an outside body (including the Wage Earner Protection Program). Including a power to transmit information in this Act would therefore be redundant.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 29
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

29. No person shall knowingly use, communicate or allow to be communicated the Social Insurance Number of an individual that was obtained for a purpose related to an application for a payment under this Act except for the purpose of the administration or enforcement of this Act or the Income Tax Act.

Rationale

This section is designed to protect the integrity of the Social Insurance Number by restricting its transmission.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 30
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

30. The Minister may delegate to any person the exercise of any power or the performance of any duty or function that may be exercised or performed by the Minister under this Act.

Rationale

This provision allows the Minister to delegate his or her powers and functions under the Act.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 31
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

31. (1) Subject to subsections (2) to (4), the Minister may, on his or her initiative, conduct an audit of any application for payment under this Act.

(2) An audit of an application in respect of which a payment was made may be conducted at any time within three years after the day on which the payment was made.

(3) If the Minister has reasonable grounds to believe that a payment was made on the basis of any false or misleading information, an audit of the application in respect of which the payment was made may be conducted at any time within six years after the payment was made.

(4) An audit of an application in respect of which no payment was made may be conducted at any time within three years after the day on which the applicant was sent a notice informing the applicant that he or she was not eligible to receive a payment.

Rationale

This provision allows the Minister to audit payments from the WEPP after they are made in order to detect errors or fraudulent claims.

The power to conduct audits is reinforced by the powers given to the Minister to compel witnesses to give evidence under oath and to summon documents under section 24 of the Act (refer to clause 1, section 24 of the Bill, above) and to enter locations and dwelling places to obtain information under sections 25 and 26 of the Act (refer to clause 1, sections 25 and 26, above).

This provision will ensure accountability in the administration of the WEPP while providing a tool to detect fraudulent applications which can be addressed through other provisions of the Act.

Ensuring accountability and fairness:

The audit powers provided in this section allow the Minister (or designate) to ensure accountability in the administration of the Program by detecting errors in past applications. Other sections of the Act provide the tools necessary to correct those errors.

• Section 34 allows the Minister (or designate) to pay amounts that were owing to individuals who did not receive their full entitlement under the Program (refer to clause 1, section 34 of the Bill).
• Sections 32 and 33 enable the recovery of over-payments from WEPP claimants (refer to clause 1, sections 32 and 33 of the Bill).

Protecting the integrity of the Program:

The audit powers also allow the Minister (or designate) to protect the integrity of the Program by providing a tool to detect fraudulent activity. The audit function provides the Minister (or designate) with a tool to gather information necessary to recover over-payments from the Program (which is enabled under sections 32 and 33 of the Act) and to gather evidence necessary to prosecute frauds perpetrated against the Program (under sections 38 and 39 of the Act.) This audit function will also serve as a deterrent to fraudulent activity.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 32,33
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

32. (1) If the Minister determines that an individual who received a payment was not eligible to receive the payment or has received a payment in an amount greater than the amount the individual was eligible to receive, the Minister shall send to the individual a notice

• (a) informing the individual of the determination; and
• (b) specifying the amount that the individual was not eligible to receive.

(2) The amount specified in the notice may be recovered from the individual as a debt due to Her Majesty in right of Canada.

(3) The amount of any debt referred to in subsection (2) that remains unpaid 30 days after the notice referred to in that subsection is sent may be certified by the Minister, and registration of the certificate in the Federal Court has the same effect as a judgment of that Court for a debt of the amount specified in the certificate and all related registration costs.

33. If the Minister is of the opinion that a person is or is about to become liable to make a payment to a person who is liable to Her Majesty under section 32, the Minister may, by written notice, order the first person to pay to the Receiver General, on account of the second person's liability, all or part of the money otherwise payable to the second person.

Rationale

These sections give the Minister the power to protect the integrity of the Program by recovering over-payments from the WEPP. Such overpayments would be detected through audits conducted under section 31 of the Act (see clause 1, section 31, above) and through investigations undertaken with the powers of the Minister (or designate) to summon witnesses, compel documents, and search locations and dwellings for information.

Over-payments will be considered debts to the Crown, and the procedures to recover the debt include:

• writing to the individual informing them of the over-payment and demanding repayment as a debt to the Crown;
• after 30 days of the notice, the Minister (or designate) may (but is not compelled to) register a certificate of the over-payment in the Federal Court, so that the payment notice acquires the legal status of being a judgement of the Court and becomes enforceable as a judgement of the Court. The debtor must also bear the costs of certification and any related costs. The power of the Minister is elective in order to allow individuals who owe an overpayment to request more time to repay the amount (over and above the 30 day limit), in order to avoid imposing hardships on individuals who incurred an overpayment from the Program through no fault of their own. The registration enables the Minister (or designate) to take legal measures to recover the amount owing (e.g. seizing the assets of the person liable for the overpayment, and selling them); and
• garnishing any payments which a third party makes to the recipient of the over-payment.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 34
Topic: ADMINISTRATION (POWERS OF MINISTER)

Proposed Wording

34. If the Minister determines that an individual has not received a payment that he or she is eligible to receive, or has not received the full amount that he or she is eligible to receive, the Minister shall approve a payment to the individual in an amount equal to the amount that the individual did not receive.

This provision will ensure greater fairness for applicants to the Program. Underpayments would be detected through audits conducted under section 31 of the Act (refer to clause 1, section 31 of the Bill) and, possibly, through investigations undertaken by the Minister (or designate) under sections 24 to 26 of the Act (refer to clause 1, sections 24 to 26 of the Bill).

Rationale

Present Law

Not applicable.

WEPP: Financial provisions

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 35
• Bill Clause No. 1 - WEPP Section 36
• Bill Clause No. 1 - WEPP Section 37

Bill Clause No. 1
Section No. 35
Topic: FINANCIAL PROVISIONS

Proposed Wording

35. There may be paid out of the Consolidated Revenue Fund all payments authorized to be made under this Act.

Rationale

This provision identifies the funding source of funds for the Program - the Consolidated Revenue Fund (CRF).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 36
Topic: FINANCIAL PROVISIONS

Proposed Wording

36. (1) If a payment is made under this Act to an individual in respect of unpaid wages, Her Majesty in right of Canada is, to the extent of the amount of the payment, subrogated to any rights the individual may have in respect of those unpaid wages against

• (a) the bankrupt or insolvent employer; and
• (b) if the bankrupt or insolvent employer is a corporation, a director of the corporation.

(2) For the purposes of subsection (1), Her Majesty in right of Canada may maintain an action against a bankrupt or insolvent employer, or a director, either in the name of the individual referred to in that subsection or in the name of Her Majesty in right of Canada.

Rationale

This provision requires an individual who receives a payment from the WEPP to sign over his or her claim as a creditor against the bankrupt or insolvent employer's estate to the government, up to the amount of the payment that he or she receives from the WEPP. If the unpaid wage earner is owed any amounts not covered by the WEPP payment (e.g. for wage claims over and above the $3,000 limit, or for severance and termination pay), he or she can still submit a proof of claim against the employer's estate, or pursue payment from corporate directors (in jurisdictions in which corporate or labour laws hold corporate directors personally liable for those amounts).

This provision allows the Government of Canada to:

Recover pay-outs from the Program:

The WEPP will recover pay-outs as fully as possible by making claims against the bankrupt employer's estate in the place of the wage earner. This Bill (clause 67, sections 81.3 and 81.4) proposes a "limited super priority" in the BIA that will cover bankruptcies and receiverships. The limited super priority will allow unpaid wage claims, up to $2,000, to be paid out of the proceeds of current assets (including inventory, accounts receivable and cash on hand), ahead of secured creditors. Furthermore, the existing "preferred creditor" status - set out under section 136(1)(d) - will remain for any amounts owing, under the $2,000 cap, that were not satisfied through the current assets (if there are any "fixed" assets left after the claims of secured creditors and the claims of "preferred creditors" that take priority over unpaid wage claims). With the new limited super priority, combined with the existing preferred creditor status of unpaid wage claims, it is estimated that the Government will be able to recover up to half of unpaid wage claims.

Deter strategic behaviour on the part of employers:

This provision will deter strategic behaviour on the part of employers (i.e. the "moral hazard") who may forego paying wages in the period leading to bankruptcy on the understanding that payment would be forthcoming from the WEPP. The deterrent is provided through s. 36(1)(b) and 36(2), which allow the Government of Canada to assume the rights of unpaid employees against the directors of insolvent companies under existing provisions in labour and corporate statutes. The threat of a legal action from the federal government to recover unpaid wages will provide a strong incentive for corporate directors to take steps to ensure that the business does not default on its obligation to pay wages as they become due.

Encourage secured lenders to monitor payment of wages:

The limited super priority will provide an incentive for employers to meet their payroll obligations, which will prevent abuse of the Program. The limited super priority will give unpaid wage claims (up to $2,000) priority ahead of secured creditors on current assets. Secured lenders will therefore monitor employers to ensure that they will meet their payroll obligations, as any amounts for unpaid wages that accumulate will reduce the amount that those creditors can realize from the current assets.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 37
Topic: FINANCIAL PROVISIONS

Proposed Wording

37. An amount that is payable under this Act is not capable of being assigned, charged, attached, anticipated or given as security and any transaction appearing to do so is void or, in the Province of Quebec, null.

Rationale

This section is intended to prevent individuals who are entitled to payment from signing that right over to another party. This measure is designed to prevent confusion in the administration of the WEPP (by preventing the payment of benefits to any party except the claimant, unless the payment is lawfully garnished by a third party). However, this provision still allows applications to be made on behalf of individuals (e.g. through a union or labour department) on the condition that the payment be made directly to the unpaid wage earner.

Present Law

Not applicable.

WEPP: Offences and penalties

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 38(1)
• Bill Clause No. 1 - WEPP Section 38(2)
• Bill Clause No. 1 - WEPP Section 38(3)
• Bill Clause No. 1 - WEPP Section 39
• Bill Clause No. 1 - WEPP Section 40

Bill Clause No. 1
Section No. 38(1)
Topic: OFFENCES AND PENALTIES

Proposed Wording

38. (1) Every person commits an offence who

• (a) makes a false or deceptive entry, or omits to enter a material particular, in any record or book of account that contains information that supports an application under this Act;
• (b) in relation to an application under this Act, makes a representation that the person knows to be false or misleading;
• (c) in relation to an application under this Act, makes a declaration that the person knows is false or misleading because of the non-disclosure of facts;
• (d) being required under this Act to provide information, provides information or makes a representation that the person knows to be false or misleading;
• (e) obtains a payment under this Act by false pretence;
• (f) being the payee of any cheque issued as a payment under this Act, knowingly negotiates or attempts to negotiate it knowing that the person is not entitled to the payment or any part of the payment; or
• (g) participates in, assents to or acquiesces in an act or omission mentioned in any of paragraphs (a) to (f).

Rationale

This section is designed to protect the integrity of the Program by prohibiting acts of fraud against it, or any actions that impede the administration of the Act. These offences are punishable under section 38(3) of the Act (refer to clause 1, section 38(3)).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 38(2)
Topic: OFFENCES AND PENALTIES

Proposed Wording

38. (2) Every person who fails to comply with any of the requirements of subsection 21(1) commits an offence.

Rationale

Receivers and trustees who fail to comply with the requirements set out for them in the administration of the WEPP, as set out in section 21(1) of the Act (refer to clause 1, section 21(1) of the Bill) are guilty of an offence. However:

• it is anticipated that this provision will be rarely used; rather, in the event that trustees or receivers fail to fulfil their obligations, recourse will be pursued under section 14.01 of the Bankruptcy and Insolvency Act (BIA). Under amendments proposed to the BIA in this Bill (refer to clause 115(2), section 243(4)), receivers who are appointed for receiverships that fall within the parameters of the BIA (under section 243(2)) must be licensed trustees in bankruptcy and can therefore be sanctioned for misconduct by the Superintendent of Bankruptcy under section 14.01 of the BIA.
• it should be noted that the failure to comply with directives from the Minister (under s. 21(2)) is not considered an offence. This omission is deliberate, as it would be unfair to use criminal sanctions for failing to meet a requirement that is not set out in the Act.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 38(3)
Topic: OFFENCES AND PENALTIES

Proposed Wording

38. (3) A prosecution for an offence under subsection (1) or (2) may be commenced at any time within six years after the time when the subject-matter of the prosecution arose.

Rationale

The six-year limitation on the prosecution for offences corresponds to the six-year limit on the power of the Minister to audit WEPP payments in cases of suspected fraud under section 31(3) (refer to clause 1, section 31(3) of the Bill) because, in the case of the fraud-related offences described in section 38, the detection of most of these offences would occur through audits.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 39
Topic: OFFENCES AND PENALTIES

Proposed Wording

39. (1) Every person commits an offence who delays or obstructs a person in the exercise of his or her powers or the performance of his or her duties under this Act.

(2) A prosecution for an offence under subsection (1) may be commenced at any time within two years after the time when the subject-matter of the prosecution arose.

Rationale

This section prohibits individuals from obstructing an individual designated by the Minister to perform duties under this Act, in the performance of those duties. The two year limitation period set out in section 39(2) is shorter than the six-year limitation period for section 38(1) offences (refer to clause 1, section 38(3) of the Bill) because, unlike the offences listed in section 38(1) of the Act, the detection of the offence of obstructing the Minister (or designate) set out in section 39(1) will not rely on the auditing process enabled under section 31(3). (Previous claims to the Program may only be audited during a period of six years following the issue of payment to the claimant under section 31(3) of the Act. The six-year limitation for prosecuting offences under section 38(1) of the Act corresponds with the time limit on audits imposed by section 31(3).

Present Law

Not applicable.

Bill Clause No. 1
Section No. 40
Topic: OFFENCES AND PENALTIES

Proposed Wording

40. Every person who is guilty of an offence under section 38 or 39 is liable on summary conviction to a fine of not more than $5,000 or to imprisonment for a term of not more than six months, or to both.

Rationale

This section provides proportionate penalties for offences committed under sections 38 and 39, in order to deter illegal activity and protect the integrity of the Program. The $5,000 fine is meant to provide a financial penalty greater than the maximum amount that could be defrauded through a fraud perpetrated against the WEPP (i.e. $3,000). This penalty provides a deterrent to fraudulent behaviour which enhances the deterrent effect of the power of the minister (or designate) to recover "overpayments" of WEPP benefits under section 32(3) of the Act, as any individual who received a payment from the WEPP to which he or she was not legally entitled could be compelled to repay the amount under section 32(3) of the Act (refer to clause 1, section 32(3) of the Bill).

Present Law

Not applicable.

WEPP: Regulations and review

Clause by Clause Briefing Book

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

• Bill Clause No. 1 - WEPP Section 41
• Bill Clause No. 1 - WEPP Section 42

Bill Clause No. 1
Section No. 41
Topic: REGULATIONS

Proposed Wording

41. (1) The Governor in Council may make regulations generally for carrying out the purposes of this Act, including regulations

• (a) prescribing any amounts to be wages for the purposes of this Act;
• (b) defining what constitutes a termination of employment for the purposes of paragraph 5(a);
• (c) specifying categories of wage earners and periods of time for the purposes of subsection 6(1);
• (d) defining the expressions "controlling interest" and "managerial position" for the purposes of subsection 6(2);
• (e) respecting the period within which, and the manner and form in which, applications for payments are to be made;
• (f) respecting the period within which and the manner in which payments are to be made;
• (g) respecting the period within which, and the manner and form in which, a review of a determination may be requested or an appeal may be made from a review decision;
• (h) prescribing the information that is to be provided by trustees and receivers to the Minister and to individuals for the purposes of paragraph 21(1)(d); and
• (i) respecting the period within which, and the manner and form in which, trustees and receivers are to provide the information referred to in paragraph (h).

(2) The Governor in Council may make regulations respecting the allocation of payments under this Act to the different components of wages for the purposes of subsection 7(3).

Rationale

The ability to set out details of the Program administration in regulations will facilitate the process of designing and implementing the Program itself.

• The details of the administration of the program will be too lengthy and cumbersome to be accommodated within the Act itself.
• Because orders-in-council can be adjusted more easily than legislation, placing many of the detailed legal requirements of the Program in regulations will allow the program to be adjusted as it is being implemented, if need be.
• Allowing details of the Program's administration to be set out in regulations will provide more time to develop the Program following the Royal Assent given to this Act.

For more information on the policy intent for each section of the Act in which regulation-making power is granted in this section, please refer to the briefing material that corresponds to the section listed in each clause of section 41.

Present Law

Not applicable.

Bill Clause No. 1
Section No. 42
Topic: REVIEW OF ACT

Proposed Wording

42. Within five years after the day on which this section comes into force, the Minister must cause a review of this Act and its administration and operation to be conducted, and cause a report on the review to be laid before each House of Parliament on any of the first 15 days on which that House is sitting after the review is completed.

Rationale

This provision will ensure accountability by providing a requirement that a rigorous and systematic review of the Program be submitted to Parliament in order to facilitate Parliament's oversight of the Program. The five-year review period will allow sufficient time for:

• a formative evaluation of the program (to allow problems with the implementation to be identified and to allow adjustments to the Program); and
• a summative evaluation (which will allow the program to be evaluated with reference to its stated objectives).

Present Law

Not applicable.

BIA: Definitions

Clause by Clause Briefing Book

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

• Bill Clause No. 2 - BIA Section 2
• Bill Clause No. 3 - BIA Section 2.1
• Bill Clause No. 4 - BIA Section 3
• Bill Clause No. 5 - BIA Sections 4(1), 4(2)(b) and (c), 4(3)(a) to (d) and 4(4)

Bill Clause No. 2
Section No. 2
Topic: Definitions

Proposed Wording

2. (1) The definition "settlement" in section 2 of the Bankruptcy and Insolvency Act is repealed.

(2) The definition « localité d'un débiteur » in section 2 of the French version of the Bankruptcy and Insolvency Act is repealed.

(3) The definitions "court", "creditor", and "person" in section 2 of the Act are replaced by the following:

"court", except in paragraphs 178(1)(a) and (a.1) and sections 204.1 to 204.3 , means a court referred to in subsections 183(1) and (1.1) or a judge of that court, and includes a registrar when exercising the powers of the court conferred on a registrar under this Act;

"creditor" means a person having a claim provable as a claim under this Act;

"person" includes a partnership, an unincorporated association, a corporation, a cooperative society, an organization or an income trust, the successors of a partnership, of an association, of a corporation, of a society, of an organization or of an income trust, and the heirs, executors, liquidators of the succession, administrators or other legal representative of a person;

(4) The definition "locality of a debtor" in section 2 of the English version of the Act is replaced by the following:

"locality of a debtor" means the principal place

• (a) where the debtor has carried on business during the year immediately preceding the date of the initial bankruptcy event,
• (b) where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event, or
• (c) in cases not coming within paragraph (a) or (b), where the greater portion of the property of the debtor is situated;

(5) Section 2 of the Act is amended by adding the following in alphabetical order:

"bargaining agent" means any trade union that has entered into a collective agreement on behalf of the employees of a person;

"collective agreement", in relation to an insolvent person, means a collective agreement within the meaning of the jurisdiction governing collective bargaining between the insolvent person and a bargaining agent;

"current assets" means unrestricted cash, or any other asset that, in the normal course of operations, is expected to be converted into cash or consumed in the production of income within one year or within the normal operating cycle when it is longer than a year;

"date of the bankruptcy", in respect of a person, means the date of

• (a) the granting of a bankruptcy order against the person,
• (b) the filing or making of an assignment by or in respect of the person, or
• (c) the event that causes an assignment by the person to be deemed;

"director" includes any individual, however designated, acting in any capacity that is similar to that of a director of a corporation;

"income trust" means a trust

• (a) that has assets in Canada, and
• (b) the units of which are traded on a prescribed stock exchange;

"time of the bankruptcy", in respect of a person, means the time of

• (a) the granting of a bankruptcy order against the person,
• (b) the filing of an assignment by or in respect of the person, or
• (c) the event that causes an assignment by the person to be deemed;

"transfer at undervalue" means a transaction in which the consideration received by a person is conspicuously less than the fair market value of the property or services sold or disposed of by the person in the transaction;

(6) Section 2 of the French version of the Act is amended by adding the following in alphabetical order:

« localité » En parlant d'un débiteur, le lieu principal où, selon le cas :

• a) il a exercé ses activités au cours de l'année précédant l'ouverture de sa faillite;
• b) il a résidé au cours de l'année precedent l'ouverture de sa faillite;
• c) se trouve la plus grande partie de ses biens, dans les cas non visés aux alinéas a) ou b).

Rationale

The word "settlement" will no longer be used in the BIA. The existing causes of action for settlements are replaced with a new cause of action for transfers at undervalue.

A new definition of "localité" is added in the French version of the BIA at clause 2(6) of the Bill.

The definition "court" has been amended to remove reference to subsection 243(1) because of concurrent amendments to that subsection which renders the current definition meaningless.

The definition "creditor" has been amended to remove reference to "unsecured, preferred by virtue of priority under section 136 or secured". The new definition expands the meaning of creditor. Concurrent amendments have created new claimants who should be considered "creditors" for the purpose of the Act but who are not strictly unsecured, preferred by virtue of section 136 or secured.

The definition "locality of a debtor" has been amended to clarify that the appropriate time for determining the residency of a debtor is at the time of the initial bankruptcy event, the practical time a bankruptcy occurs, rather than the date a bankruptcy petition is filed, the technical time that a debtor becomes a bankrupt.

The French definition « localité » has been amended for similar reasons as the English definition "locality of a debtor".

The remaining definitions have been included to support other amendments to the Act.

Present Law

"court", except in paragraphs 178(1)(a) and (a.1) and sections 204.1 to 204.3 and subject to subsection 243(1), means the court having jurisdiction in bankruptcy or a judge thereof, and includes a registrar when exercising the powers of the court conferred on a registrar under this Act;

"creditor" means a person having a claim, unsecured, preferred by virtue of priority under section 136 or secured, provable as a claim under this Act;

"person" includes a partnership, an unincorporated association, a corporation, a cooperative society or an organization, the successors of a partnership, association, corporation, society or organization, and the heirs, executors, liquidators of the succession, administrators or other legal representative of a person, according to the law of that part of Canada to which the context extends;

"settlement" includes a contract, covenant, transfer, gift and designation of beneficiary in an insurance contract, to the extent that the contract, covenant, transfer, gift or designation is gratuitous or made for merely nominal consideration;

"locality of a debtor" means the principal place

• (a) where the debtor has carried on business during the year immediately preceding his bankruptcy,
• (b) where the debtor has resided during the year immediately preceding his bankruptcy, or
• (c) in cases not coming within paragraph (a) or (b), where the greater portion of the property of the debtor is situated;

« localité d'un débiteur » Le lieu principal où, selon le cas :

• a) le débiteur a exercé ses activités au cours de l'année précédant sa faillite;
• b) le débiteur a résidé au cours de l'année précédant sa faillite;
• c) se trouve la plus grande partie des biens de ce débiteur, dans les cas non visés aux alinéas a) ou b).

Senate Recommendation

None.

Bill Clause No. 3
Section No. 2.1
Topic: Insurance Contracts

Proposed Wording

2.1. A change in the designation of a beneficiary in an insurance contract is deemed to be a disposition of property for the purpose of this Act.

Rationale

The reform is intended to prevent strategic behaviour by bankrupts whereby the bankrupt disposes of property, in this case an interest in an insurance contract, prior to the bankruptcy with an intention to defeat their creditors. The amendment deems a change in the designation of a beneficiary in an insurance contract to be a disposition of property, which will bring the action within the transfers at undervalue provisions and allow creditors to challenge the transaction.

Present Law

2.1. For the purposes of this Act, the bankruptcy or putting into bankruptcy of a person occurs at the time or date of

• (a) the granting of a bankruptcy order against the person;
• (b) the filing of an assignment by or in respect of the person; or
• (c) the event that causes an assignment by the person to be deemed.

Senate Recommendation

None.

Bill Clause No. 4
Section No. 3
Topic: Meaning of "Reviewable Transaction"

Proposed Wording

4. Section 3 of the Act is repealed.

Rationale

The concept of "reviewable transaction" will no longer be used in the BIA. The existing causes of action for reviewable transactions are replaced with a new cause of action for transfers at undervalue.

Subsections (2) and (3) will be retained and moved to new subsections 4(4) and (5).

Present Law

3. (1) For the purposes of this Act, a person who has entered into a transaction with another person otherwise than at arm's length shall be deemed to have entered into a reviewable transaction.

(2) It is a question of fact whether persons not related to one another within the meaning of section 4 were at a particular time dealing with each other at arm's length.

(3) Persons related to each other within the meaning of section 4 shall be deemed not to deal with each other at arm's length while so related.

Senate Recommendation

None.

Bill Clause No. 5
Section No. 4(1), 4(2)(b) and (c), 4(3)(a) to (d) and 4(4)
Topic: Meaning of "related persons"

Proposed Wording

4. (1) "entity" means a person other than an individual;

[Paragraph 4(2)(a) does not change.]

• (2)(b) an entity and
  • (i) a person who controls the entity, if it is controlled by one person,
  • (ii) a person who is a member of a related group that controls the entity, or
  • (iii) any person connected in the manner set out in paragraph (a) to a person described in subparagraph (i) or (ii); or
• (c) two entities
  • (i) both controlled by the same person or group of persons,
  • (ii) each of which is controlled by one person and the person who controls one of the entities is related to the person who controls the other entity,
  • (iii) one of which is controlled by one person and that person is related to any member of a related group that controls the other entity,
  • (iv) one of which is controlled by one person and that person is related to each member of an unrelated group that controls the other entity,
  • (v) one of which is controlled by a related group a member of which is related to each member of an unrelated group that controls the other entity, or
  • (vi) one of which is controlled by an unrelated group each member of which is related to at least one member of an unrelated group that controls the other entity.

(3) For the purposes of this section,

• (a) if two entities are related to the same entity within the meaning of subsection (2), they are deemed to be related to each other;
• (b) if a related group is in a position to control an entity, it is deemed to be a related group that controls the entity whether or not it is part of a larger group by whom the entity is in fact controlled;
• (c) a person who has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, ownership interests, however designated, in an entity, or to control the voting rights in an entity, is, except when the contract provides that the right is not exercisable until the death of an individual designated in the contract, deemed to have the same position in relation to the control of the entity as if the person owned the ownership interests;
• (d) if a person has ownership interests in two or more entities, the person is, as holder of any ownership interest in one of the entities, deemed to be related to himself or herself as holder of any ownership interest in each of the other entities;

[Paragraphs 4(3)(e), (f), (f.1) and (g) do not change.]

(4) It is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm's length.

(5) Persons related to each other are deemed not to deal with each other at arm's length while so related.

Rationale

The provision provides an explanation for what is meant, within the Act, by the term "related person". The reforms are technical amendments to expand the scope of the provision and to re-order sections within the Act.

The amendment to subsection 4(1) creates a definition of "entity", which means a person other than an individual. The definition of "person" for the purpose of the Act includes partnerships, unincorporated associations, corporations, cooperative societies, organizations and income trusts. The current provision, which only accounted for individuals and corporations, lacked the scope needed to capture persons that were related but that were not individuals or corporations. The concurrent reform that includes "income trusts" in the definition of person made this amendment necessary because of the structure of income trusts, which may include within its "corporate group" both corporations and partnerships along with the income trust.

The amendments to subsections 4(2) and (3) replace "corporation" with "entity" and replace "shares" with "ownership interests" to denote the many kinds of interests that may be captured - for example, a partnership interest or a unit in an income trust.

Subsections (4) and (5) are current subsections 2(2) and (3). The provisions have been moved to this section as a more rational ordering of sections.

Present Law

4. (2)(b) a corporation and

• (i) a person who controls the corporation, if it is controlled by one person,
• (ii) a person who is a member of a related group that controls the corporation, or
• (iii) any person connected in the manner set out in paragraph (a) to a person described in subparagraph (i) or (ii); or

(2)(c) two corporations

• (i) controlled by the same person or group of persons,
• (ii) each of which is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation,
• (iii) one of which is controlled by one person and that person is related to any member of a related group that controls the other corporation,
• (iv) one of which is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation,
• (v) one of which is controlled by a related group a member of which is related to each member of an unrelated group that controls the other corporation, or
• (vi) one of which is controlled by an unrelated group each member of which is related to at least one member of an unrelated group that controls the other corporation.

(3) (a) where two corporations are related to the same corporation within the meaning of subsection (2), they shall be deemed to be related to each other;

(b) where a related group is in a position to control a corporation, it shall be deemed to be a related group that controls the corporation whether or not it is part of a larger group by whom the corporation is in fact controlled;

(c) a person who has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provides that the right is not exercisable until the death of an individual designated therein, be deemed to have the same position in relation to the control of the corporation as if he owned the shares;

(d) where a person owns shares in two or more corporations, he shall, as shareholder of one of the corporations, be deemed to be related to himself as shareholder of each of the other corporations;

Senate Recommendation

None.

BIA: Supervisory role of OSB and role of trustees

Clause by Clause Briefing Book

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

• Bill Clause No. 6 - BIA Sections 5 (1), (3)(b), (3)(e) and (4)(d.1)
• Bill Clause No. 7 - BIA Section 6.1
• Bill Clause No. 8 - BIA Sections 10 (1) and (3)
• Bill Clause No. 9 - BIA Section 13 (3)
• Bill Clause No. 10 - BIA Section 13.2(5)(a)
• Bill Clause No. 11 - BIA Section 13.3(1.1) and (2)(b)
• Bill Clause No. 12 - BIA Section 13.4(1)
• Bill Clause No. 13 - BIA Section 13.5 and 13.6
• Bill Clause No. 14 - BIA Section 14.01(g)
• Bill Clause No. 15 - BIA Sections 14.02(1), (1.1)(1.2) and (1.3)

Bill Clause No. 6
Section No. 5 (1), (3)(b), (3)(e) and (4)(d.1)
Topic: Appointment and Powers of the Superintendent

Proposed Wording

5. (1) The Governor in Council shall appoint a Superintendent of Bankruptcy to hold office during good behaviour for a term of not more than five years, but the Superintendent may be removed from office by the Governor in Council for cause. The Superintendent's term may be renewed for one or more further terms.

(1.1) The Superintendent shall be paid the salary that the Governor in Council may fix.

(3) (b) monitor the conditions that led to a trustee being issued a licence to determine whether those conditions continue to exist after the licence has been issued and take the appropriate action if he or she determines that the conditions no longer exist;

[Paragraphs (3)(c) and (d) do not change]

• (e) from time to time, make or cause to be made any inquiry or investigation of estates or other matters to which this Act applies, including the conduct of a trustee or a trustee acting as a receiver, within the meaning of subsection 243(2), or as an interim receiver, that the Superintendent considers appropriate, and for the purpose of the inquiry or investigation the Superintendent or any person appointed by the Superintendent for the purpose shall have access to and the right to examine and make copies of all books, records, data, including data in electronic form, documents and papers, that are relevant to an inquiry or investigation pertaining or relating to any estate or other matter to which this Act applies;

[Paragraphs 4(a) to (d) do not change]

(4) (d.1) issue directives respecting the rules governing hearings for the purposes of section 14.02; and

Rationale

Subsections (1) and (1.1) provide for the mandate of the Superintendent. The current provision provides that the Superintendent sits at the pleasure of the Governor in Council. Due to the decision-making authority of the Superintendent, an "at pleasure" appointment is of questionable constitutional validity and it has, in fact, been challenged. A fixed term appointment should defeat any challenges based on the Superintendent's impartiality and the term of five years is a common period for such appointments.

A trustee's licence may be issued on specific terms and conditions determined by the Superintendent to be appropriate in the circumstances, which terms and conditions the trustee is required to abide by. The reform in paragraph (3)(b) is intended to grant the Superintendent the authority to revoke the licence where the trustee fails to meet the conditions that led to the granting of the licence and not, as would otherwise be required, in the event of serious misconduct by the trustee. The amendment is a proper expansion of the Superintendent's powers because it ensures that the trustee complies with the terms and conditions put in place to protect the public.

The reform to paragraph (3)(e) to add "inquiry" is a technical amendment intended to make the English version correspond with the French version.

The French version at paragraph (3)(e) has been amended to clarify that the Superintendent has the power to discipline trustees with respect to actions taken when they were not acting in the capacity of a trustee, as is provided for in the English version. The reform is intended to create parallelism between the English and French versions.

The reform to paragraph (4)(d.1) is intended to allow the Superintendent to issue directives to ensure consistency in the procedures governing hearings under section 14.02.

Present Law

5. (1) The Governor in Council shall appoint a Superintendent of Bankruptcy to hold office during pleasure who shall be paid such salary as the Governor in Council may fix.

(3) (e) from time to time make or cause to be made such inspection or investigation of estates or other matters to which this Act applies, including the conduct of a trustee or a trustee acting as a receiver or interim receiver, as the Superintendent may deem expedient and for the purpose of the inspection or investigation the Superintendent or any person appointed by the Superintendent for the purpose shall have access to and the right to examine and make copies of all books, records, data, including data in electronic form, documents and papers pertaining or relating to any estate or other matter to which this Act applies;

Senate Recommendation

None.

Bill Clause No. 7
Section No. 6.1
Topic: Outside investigations

Proposed Wording

6. (1) The Superintendent may engage any persons that the Superintendent considers advisable to conduct any inquiry or investigation or to take any other necessary action outside of the office of the Superintendent, and the cost and expenses of those persons shall, when certified by the Superintendent, be payable out of the appropriation for the office of the Superintendent.

Rationale

The amendment of subsection (1) is intended to make the English version correspond with the French version, which is broader by including "inquiries" and not limiting the provision's application only to the more formal "investigation".

Present Law

6. (1) The Superintendent may engage such persons as the Superintendent may deem advisable to conduct any inspection or investigation or to take any other necessary action outside of the office of the Superintendent, and the cost and expenses thereof shall, when certified by the Superintendent, be payable out of the appropriation for the office of the Superintendent.

Senate Recommendation

None.

Bill Clause No. 8
Section No. 10 (1) and (3)
Topic: Investigations and Examinations

Proposed Wording

10. (1) If, on information supplied by an official receiver, trustee or other person, the Superintendent suspects, on reasonable grounds, that a person has, in connection with any estate or matter to which this Act applies, committed an offence under this or any other Act of Parliament, the Superintendent may, if it appears to the Superintendent that the alleged offence might not otherwise be investigated, make or cause to be made any inquiries or investigations that the Superintendent considers appropriate.

(3) If, on the application of the Superintendent or the Superintendent's authorized representative, a subpoena has been issued by the court, the Superintendent may, for the purpose of an inquiry or investigation under subsection (1), examine or cause to be examined under oath before the registrar of the court or other authorized person, the trustee, the debtor, any person who the Superintendent suspects, on reasonable grounds, has knowledge of the affairs of the debtor, or any person who is or has been an agent or a mandatary, or a clerk, a servant, an officer, a director or an employee of the debtor or the trustee, with respect to the conduct, dealings and transactions of the debtor, the causes of the bankruptcy or insolvency of the debtor, the disposition of the debtor's property or the administration of the estate, and may order any person liable to be so examined to produce any books, records, data, including data in electronic form, documents or papers in the person's possession or under the person's control.

Rationale

The intention of the reform is to expand the Superintendent's authority to investigate suspected or alleged misconduct, whether or not the action is a response to a formal complaint. The current provision limits the Superintendent's authority to investigate the conduct of the debtor only. The reform will ensure that an investigation may be made into any matter. The reform will ensure that the Superintendent will be able to investigate suspicious actions of trustees, receivers, interim receivers and other parties to the bankruptcy. The expansion of power is necessary to adequately protect the interests of all creditors.

The reform to subsection (3) is a concurrent technical amendment that provides the Superintendent with the authority to examine the trustee as well as the debtor and their respective agents or employees.

Present Law

10. (1) Where, on information supplied by an official receiver, trustee or other person, the Superintendent suspects, on reasonable grounds, that a person has, in connection with any estate or matter to which this Act applies, committed an offence under this Act or any other Act of Parliament, the Superintendent may, if it appears to the Superintendent that the alleged offence might not otherwise be investigated, make or cause to be made such inquiries or investigations as the Superintendent deems expedient with respect to the conduct, dealings and transactions of the debtor concerned, the causes of the bankruptcy or insolvency of the debtor and the disposition of the property of the debtor.

(3) If, on the application of the Superintendent or the Superintendent's authorized representative, a subpoena has been issued by the court, the Superintendent may, for the purpose of an investigation under subsection (1), examine or cause to be examined under oath before the registrar of the court or other authorized person, the debtor, any person who the Superintendent suspects, on reasonable grounds, has knowledge of the affairs of the debtor, or any person who is or has been an agent or a mandatary, or a clerk, a servant, an officer, a director or an employee of the debtor, with respect to the conduct, dealings and transactions of the debtor, the causes of the bankruptcy or insolvency of the debtor, and the disposition of the property of the debtor, and may order any person liable to be so examined to produce any books, records, papers or documents in the person's possession or under the control of the person relating to the debtor and the conduct, dealings and transactions of the debtor, the causes of the bankruptcy or insolvency of the debtor or the disposition of the debtor's property.

Senate Recommendation

None.

Bill Clause No. 9
Section No. 13 (3)
Topic: Licensing of Trustees

Proposed Wording

13. (3) The Superintendent may refuse to issue a licence to an applicant who is insolvent or has been found guilty of an indictable offence that, in the Superintendent's opinion, is of a character that would impair the trustee's capacity to perform his or her fiduciary duties.

Rationale

The amendment is intended to clarify the circumstances in which the Superintendent will exercise the discretion to refuse to grant a licence to a person found guilty of an indictable offence. The intention is that the discretion should be exercised where the indictable offence is related to fiduciary relationships, fraud, theft or similar actions that would lead to questions as to the fitness of the person to act as a trustee.

The term "convicted" has been replaced with the term "found guilty" due to concerns that the French term for "convicted" is more restrictive than what is intended. The reform should create better parallelism between the French and English versions of the Act.

Present Law

13. (3) The Superintendent may refuse to issue a licence to an applicant who is insolvent or has been convicted of an indictable offence.

Senate Recommendation

None.

Bill Clause No. 10
Section No. 13.2(5)(a)
Topic: Suspension of Trustee's License

Proposed Wording

13.2 (5)(a) if the trustee has been found guilty of an indictable offence that, in the Superintendent's opinion, is of a character that would impair the trustee's capacity to perform his or her fiduciary duties;

Rationale

The amendment is intended to clarify the circumstances in which the Superintendent will exercise the discretion to suspend a trustee's licence where the trustee has been found guilty of an indictable offence. The intention is that the discretion should be exercised where the indictable offence is related to fiduciary relationships, fraud, theft or similar actions that would lead to questions as to the fitness of the person to act as a trustee.

The term "convicted" has been replaced with the term "found guilty" due to concerns that the French term for "convicted" is more restrictive than what is intended. The reform should create better parallelism between the French and English versions of the Act.

Present Law

13.2 (5)(a) if the trustee is convicted of an indictable offence;

Senate Recommendation

None.

Bill Clause No. 11
Section No. 13.3(1.1) and (2)(b)
Topic: Notice of Court Hearing

Proposed Wording

13.3. (1.1) A trustee who applies for the permission of the court for the purposes of subsection (1) shall without delay send a copy of the application to the Superintendent.

(2)(b) the receiver, within the meaning of subsection 243(2), or the liquidator of the property of any person related to the debtor,

Rationale

Subsection (1.1) is intended to ensure that the Superintendent has notice of any court proceedings related to allowing a trustee to act with respect to an estate where the trustee is in a conflict of interest. The purpose is to provide the Superintendent with an opportunity to intervene in cases that the Superintendent does not believe it is appropriate to have an order granted.

The amendment to paragraph 13.3(2)(b) is a technical amendment that corresponds with the concurrent amendments to the provisions dealing with receivers in section 243.

Present Law

13.3(2)(b) the receiver or the liquidator of the property of any person related to the debtor,

Senate Recommendation

None.

Bill Clause No. 12
Section No. 13.4(1)
Topic: Trustee acting for secured creditors

Proposed Wording

13.4. (1) No trustee shall, while acting as the trustee of an estate, act for or assist a secured creditor of the estate to assert any claim against the estate or to realize or otherwise deal with the security that the secured creditor holds, unless the trustee has obtained a written opinion of legal counsel who has not acted for the secured creditor in the previous two years and is not related to the trustee that the security is valid and enforceable as against the estate.

Rationale

The reform is part of the amendments designed to address conflict of interest issues. The current provision provides that a trustee may act on behalf of a secured creditor to realize assets from the estate for which the trustee is acting provided the trustee receives independent legal advice that the security is effective. The ability for the trustee to act creates greater efficiency, however, the perceived conflict of interest requires strong limitations to remove the apprehension of bias.

The amendment requires that "independent" legal counsel has not recently acted for the secured creditor and is not related to the trustee. The reforms should ensure any perceived biased due to a relationship with the secured creditor or the trustee is prohibited.

Present Law

13.4. (1) No trustee shall, while acting as the trustee of an estate, act for or assist a secured creditor of the estate to assert any claim against the estate or to realize or otherwise deal with the security that the secured creditor holds, unless the trustee has obtained a written opinion of a legal counsel who does not act for the secured creditor that the security is valid and enforceable as against the estate.

Senate Recommendation

None.

Bill Clause No. 13
Section No. 13.5 and 13.6
Topic: Trustee's Code of Ethics

Proposed Wording

13.5 A trustee shall comply with the prescribed Code of Ethics.

13.6 A trustee shall not engage the services of a person

• (a) whose trustee licence has been cancelled under paragraph 13.2(5)(a) or subsection 14.01(1); or
• (b) who is the subject of a direction made by the Superintendent under paragraph 14.03(1)(d).

French Version

13.6 Le syndic ne peut retenir les services d'une personnne:

Rationale

Section 13.5 is a technical amendment to clarify that a Code of Ethics has been prescribed.

Paragraph 13.6(a) expands the application of the provision to include trustees whose licences have not been cancelled but who have otherwise been made subject to conservatory measures and, more specifically, to circumstances in which the Superintendent has directed the Official Receiver not to appoint the trustee to any new estate until a disciplinary matter is dealt with by the Superintendent.

In addition, section 13.6 in the French version is amended as the current provision only refers to employees, whereas it should also apply to persons acting as contractors.

Present Law

13.5 A trustee shall comply with such code of ethics respecting the conduct of trustees as may be prescribed.

13.6 A trustee shall not engage the services of a person whose trustee licence has been cancelled under paragraph 13.2(5)(a) or subsection 14.01(1).

French Version

13.6 Le syndic ne peut employer une personne don't le surintendant a annulé la licence aux termes de l'alinéa 13.2(5)a) ou du paragraphe 14.01(1).

Senate Recommendation

None.

Bill Clause No. 14
Section No. 14.01 d)
Topic: Superintendent's Powers

Proposed Wording

14.01(1)(g) require the trustee to do anything that the Superintendent considers appropriate and that the trustee has agreed to.

Rationale

Subsection 14.01(1) sets out the actions that the Superintendent may take when, after an investigation, it has been determined that action must be taken to correct the conduct of a trustee. The reform at paragraph (g) is intended to allow more flexibility. The trustee and the Superintendent will be able to negotiate measures that are appropriate in the circumstances and allow the Superintendent to enforce those measures against the trustee.

Present Law

None.

Senate Recommendation

None.

Bill Clause No. 15
Section No. 14.02(1), (1.1)(1.2) and (1.3)
Topic: Disciplinary hearings

Proposed Wording

14.02 (1) Before deciding whether to exercise any of the powers referred to in subsection 14.01(1), the Superintendent shall send the trustee written notice of the powers that the Superintendent may exercise and the reasons why they may be exercised and afford the trustee a reasonable opportunity for a hearing.

(1.1) The Superintendent may, for the purpose of the hearing, issue a subpoena or other request or summons, requiring and commanding any person named in it

• (a) to appear at the time and place mentioned in it;
• (b) to testify to all matters within his or her knowledge relative to the subject-matter of the investigation into the conduct of the trustee; and
• (c) to bring and produce any books, records, data, including data in electronic form, documents or papers in the person's possession or under the person's control relative to the subject-matter of the investigation.

(1.2) A person may be summoned from any part of Canada by virtue of a subpoena, request or summons issued under subsection (1.1).

(1.3) Any person summoned under subsection (1.1) is entitled to receive the like fees and allowances for so doing as if summoned to attend before the Federal Court.

Rationale

The current provision states that, where the Superintendent intends to discipline a trustee for misconduct, the Superintendent must give the trustee the opportunity to be heard. There is concern that the current wording is open to challenge because of an apprehension of bias. Strictly read, the provision requires the Superintendent to give a trustee an opportunity to be heard only after the Superintendent has already decided to punish the trustee. It may be argued that the Superintendent is not an impartial adjudicator in that circumstance because the Superintendent has already determined the guilt of the trustee. That is not the purpose of the provision nor is it how the Superintendent proceeds in these cases so a correction is called for to accurately set forth the proceedings.

Therefore, the reform to section (1) is a technical amendment to clarify that the Superintendent must give the trustee an opportunity to be heard prior to making a decision in the matter. In the notice sent to the trustee, the Superintendent is required to provide the trustee with information regarding the purpose of the hearing and the possible consequences to the trustee. This should provide greater fairness as the trustee will better understand the issue against them and the possible repercussions.

Subsections (1.1) to (1.3) provide the Superintendent with the authority to subpoena persons to appear at the hearing. The provisions are similar to the Superintendent's powers in respect of hearings regarding the debtor's conduct

Present Law

14.02 (1) Where the Superintendent intends to exercise any of the powers referred to in subsection 14.01(1), the Superintendent shall send the trustee written notice of the powers that the Superintendent intends to exercise and the reasons therefore and afford the trustee a reasonable opportunity for a hearing.

Senate Recommendation

None.

BIA: Supervisory role of OSB and role of trustees

Clause by Clause Briefing Book

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

• Bill Clause No. 16 - BIA Sections 14.03(1), (2)(b) and (2)(f)
• Bill Clause No. 17 - BIA Sections 14.06(1.1) and (1.2)
• Bill Clause No. 18 - BIA Section 19(3)
• Bill Clause No. 19 - BIA Section 21
• Bill Clause No. 20 - BIA Sections 25 (1), (1.1), (1.2), (1.3), (1.4) and (3)
• Bill Clause No. 21 - BIA Section 28 (1)
• Bill Clause No. 22 - BIA Section 29(2)
• Bill Clause No. 23 - BIA Sections 30(3), (4), (5) and (6)
• Bill Clause No. 24 - BIA Section 31 (1) and (2)
• Bill Clause No. 25 - BIA Section 33
• Bill Clause No. 26 - BIA Section 34 (3)
• Bill Clause No. 27 - BIA Section 35 (3)
• Bill Clause No. 28 - BIA Section 36(1)
• Bill Clause No. 29 - BIA Section 40 (1)

Bill Clause No. 16
Section No. 14.03(1), (2)(b) and (2)(f)
Topic: Disciplinary hearings

Proposed Wording

14.03(1) Subject to subsection (2), the Superintendent may, for the protection of an estate, the rights of the creditors or the debtor,

(2)(b) the Superintendent makes or causes to be made any inquiry or investigation under paragraph 5(3)(e);

(2)(f) a trustee has been found guilty of an indictable offence that, in the Superintendent's opinion, is of a character that would impair the trustee's capacity to perform the trustee's fiduciary duties, or has failed to comply with any of the conditions or limitations to which the trustee's licence is subject; or

Rationale

The amendment to subsection (1) is intended to ensure that the protection of an estate extends to protection of the rights of creditors and debtors.

The reform to paragraph (2)(b) to add "inquiry" is a technical amendment intended to make the English version correspond with the French version.

The amendment to paragraph (2)(f) is intended to clarify the circumstances in which the Superintendent will exercise the discretion to refuse to grant a licence to a person found guilty of an indictable offence. The intention is that the discretion should be exercised where the indictable offence is related to fiduciary relationships, fraud, theft or similar actions that would lead to questions as to the fitness of the person to act as a trustee.

The term "convicted" has been replaced with the term "found guilty" due to concerns that the French term for "convicted" is more restrictive than what is intended. The reform should create better parallelism between the French and English versions of the Act.

Present Law

14.03(1) The Superintendent may, for the protection of an estate in the circumstances referred to in subsection (2),

(2)(b) the Superintendent makes or causes to be made any investigation pursuant to paragraph 5(3)(e);

(2)(f) a trustee is convicted of an indictable offence or has failed to comply with any of the conditions or limitations to which the trustee's licence is subject; or

Senate Recommendation

None.

Bill Clause No. 17
Section No. 14.06(1.1) and (1.2)
Topic: Trustee Liability

Proposed Wording

14.06(1.1) In subsections (1.2) to (6), a reference to a trustee means a trustee in a bankruptcy or proposal and includes

• (a) an interim receiver;
• (b) a receiver within the meaning of subsection 243(2); and
• (c) any other person who has been lawfully appointed to take, or has lawfully taken, possession or control of any property of an insolvent person or a bankrupt that was acquired for, or is used in relation to, a business carried on by the insolvent person or bankrupt.

(1.2) Despite anything in any federal or provincial law, if a trustee carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount if the claim is in relation to a debt or liability, present or future, to which the debtor is subject on the day on which the trustee is appointed.

Rationale

Subsection (1.1) is an explanatory provision. For the purposes of this section, references to a trustee are deemed to include interim receivers, receivers and persons acting like receivers without that designation. The reform is intended to ensure that a person who, under a security agreement, acts as a receiver but who does not fall within the four corners of section 243 still obtains the protection that receivers are granted.

Subsection (1.2) is intended to clarify that trustees (as defined to include interim receivers, receivers and those acting like receivers) are not personally liable for obligations or liabilities to which the debtor company was subject on the day on which the trustee was appointed.

Present Law

(1.1) In subsections (1.2) to (6), a reference to a trustee means a trustee in a bankruptcy or proposal and includes an interim receiver or a receiver within the meaning of subsection 243(2).

(1.2) Notwithstanding anything in any federal or provincial law, where a trustee carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount where the claim arose before or upon the trustee's appointment.

Senate Recommendation

The Bankruptcy and Insolvency Act be amended to separate clearly the personal liability of an insolvency practitioner from the liability of the debtor's estate.

Bill Clause No. 18
Section No. 19(3)
Topic: Trustees' Duties

Proposed Wording

18. Subsection 19(3) of the Act is repealed.

Rationale

Subsection 19(3) was moved to section 21, clause 19.

Present Law

19(3) The trustee shall verify the bankrupt's statement of affairs.

Senate Recommendation

None.

Bill Clause No. 19
Section No. 21
Topic: Verifying the Statement of Affairs

Proposed Wording

21. The trustee shall verify the bankrupt's statement of affairs referred to in paragraph 158(d).

Rationale

The reform to section 21 is a technical amendment to renumber existing subsection 19(3) to provide a more logical sequence. The existing section 21 is repealed to reflect current practice - trustees do not initiate criminal proceedings under the Act.

Present Law

21. The trustee may initiate such criminal proceedings as may be authorized by the creditors, the inspectors or the court against any person believed to have committed an offence under this Act.

Senate Recommendation

None.

Bill Clause No. 20
Section No. 25 (1), (1.1), (1.2), (1.3), (1.4) and (3)
Topic: Trust Funds

Proposed Wording

25(1) When acting under the authority of this Act, a trustee shall, without delay, deposit in a bank all funds received for an estate in a separate trust account for each estate.

(1.1) The trustee may deposit the funds in a deposit-taking institution, other than a bank as defined in section 2, only if deposits held by that institution are insured or guaranteed under a provincial or federal enactment that provides depositors with protection against the loss of funds on deposit with that institution.

(1.2) If the funds are situated in a country other than Canada, the trustee may, if authorized by he Superintendent, deposit them in a financial institution in that country that is similar to a bank.

(1.3) The trustee shall not withdraw any funds from the trust account of an estate without the permission in writing of the inspectors or, on application, the court, except for the payment of dividends and charges incidental to the administration of the estate.

(1.4) A trustee may, with the permission of the court, invest the funds in short-term securities of the Government of Canada or the government of a province held in trust for the estate.

(3) The trustee shall not deposit any funds received by the trustee when acting under the authority of this Act in any banking account kept by the trustee for the trustee's personal use.

Rationale

The amendment to subsection (1) is intended to ensure that the rules regarding handling of estate funds apply regardless the capacity in which the trustee is acting. As well, technical amendments were made to update language usage.

Reforms to subsections (1.1), (1.2) and (1.3) are technical amendments to the English version of the Act only, to update language usage.

Subsection (1.4) was included to provide trustees with greater flexibility to invest estate funds, which are expected to be held for an extended period. Government backed short term securities are generally regarded as safe investments and may provide a better return for the estate than a bank account.

Reforms to subsections (3) are technical amendments to update language usage.

Present Law

25(1) Subject to subsections (1.1) and (1.2), a trustee shall forthwith deposit in a bank all moneys received for an estate in a separate trust account for each estate.

(1.1) The trustee may deposit moneys pursuant to subsection (1) in a deposit-taking institution, other than a bank as defined in section 2, only if deposits held by that institution are insured or guaranteed under a provincial or federal enactment that provides depositors with protection against the loss of money on deposit with that institution.

(1.2) Where moneys referred to in subsection (1) are situated in a country other than Canada, the trustee may, where authorized by the Superintendent, deposit the moneys in a financial institution in that country that is similar to a bank.

(1.3) The trustee shall not withdraw any money from the trust account of an estate without the permission in writing of the inspectors or, on application, the court, except for the payment of dividends and charges incidental to the administration of the estate.

(3) The trustee shall not deposit any sums received by the trustee in the trustee's official capacity as a trustee in any banking account kept by the trustee for the trustee's personal use.

Senate Recommendation

None.

Bill Clause No. 21
Section No. 28 (1)
Topic: Documents to be sent to the Superintendent

Proposed Wording

28(1) The trustee shall, without delay after their receipt or preparation, send to the Superintendent, in the prescribed manner, true copies of the documents referred to in section 155 and a true copy of

• (a) the notice referred to in section 102,
• (b) the statement referred to in paragraph 158(d),
• (c) the trustee's final statement of receipts and disbursements and the dividend sheet, and
• (d) every order made by the court on the application for discharge of a bankrupt or annulling any bankruptcy, and file a copy of the documents referred to in paragraphs (b) and (c) in the court.

Rationale

The reform is a technical amendment to increase efficiency by allow in for the transfer of documents in a manner other than by mail.

Present Law

28(1) The trustee shall, forthwith after their receipt or preparation, mail to the Superintendent true copies of the documents referred to in section 155 and a true copy of

• (a) the notice referred to in section 102,
• (b) the statement referred to in paragraph 158(d),
• (c) the trustee's final statement of receipts and disbursements and the dividend sheet, and
• (d) every order made by the court on the application for discharge of a bankrupt or annulling any bankruptcy, and file a copy of the documents referred to in paragraphs (b) and (c) in the court.

Senate Recommendation

None.

Bill Clause No. 22
Section No. 29(2)
Topic: Trustees' Duties

Proposed Wording

22. Subsection 29(2) of the Act is repealed.

Rationale

The requirement for the trustee to file the reports are dealt with in concurrent amendments at clause 102, in section 170(1).

Present Law

29 (2) Every trustee before proceeding to his discharge shall, unless he has already done so, prepare and file the reports referred to in sections 170 and 171 and forward a copy of each to the Superintendent.

Senate Recommendation

None.

Bill Clause No. 23
Section No. 30(3), (4), (5) and (6)
Topic: Trustee's Powers

Proposed Wording

30 (3) If no inspectors are appointed, the trustee may do all or any of the things referred to in subsection (1).

(4) The trustee may sell or otherwise dispose of any of the bankrupt's property to a person who is related to the bankrupt only with the court's authorization.

(5) For the purpose of subsection (4), in the case of a bankrupt other than an individual, a person who is related to the bankrupt includes a person who controls the bankrupt, a director or an officer of the bankrupt and a person who is related to a director or an officer of the bankrupt.

(6) In deciding whether to grant the authorization, the court must consider, among other things,

• (a) whether the process leading to the proposed sale or disposal of the property was reasonable in the circumstances;
• (b) the extent to which the creditors were consulted in respect of the proposed sale or disposal;
• (c) the effects of the proposed sale or disposal on creditors and other interested parties;
• (d) whether the consideration to be received for the property is reasonable and fair, taking into account the market value of the property;
• (e) whether good faith efforts were made to sell or dispose of the property to persons who are not related to the bankrupt; and
• (f) whether the consideration to be received is superior to the consideration that would be received under all other offers actually received in respect of the property.

Rationale

Subsections 30(1) and (2) set out the powers that may be exercised by the trustee with the permission of the inspectors, however, it is not in every bankruptcy that inspectors are appointed. Especially when the estate is small and creditors do not believe that recovery is likely, the creditors will not expend the time or expense to have inspectors appointed. The addition of subsection (3) provides that in the absence of inspectors the trustee can act unilaterally so that an estate is not left in limbo when inspectors are not appointed.

Subsection (4) will require that the trustee obtain court approval before selling or disposing of the bankrupt's property to a person who is related to the bankrupt. Subsection (4) is intended to prevent possible abuse by "phoenix corporations". Prevalent in small business, particularly in the restaurant industry, phoenix corporations are the result of owners who engage in serial bankruptcies. A person incorporates a business and proceeds to cause it to become bankrupt. The person then purchases the assets of the business at a discount out of the estate and incorporates a "new" business using the assets of the previous business. The owner continues their original business basically unaffected while creditors are left unpaid.

Subsection (5) expands the definition of "related person" for the purposes of the section to address corporations.

Subsection (6) sets out the factors the court must consider before granting an order to sell the property. It provides legislative guidance for the court and provides direction for the debtor. The provision should improve consistency of judicial decisions.

Present Law

None.

Senate Recommendation

None.

Bill Clause No. 24
Section No. 31 (1) and (2)
Topic: Borrowing Powers

Proposed Wording

31 (1) With the permission of the court, an interim receiver, a receiver within the meaning of subsection 243(2) or a trustee may make necessary or advisable advances, incur obligations, borrow money and give security on the debtor's property in any amount, on any terms and on any property that may be authorized by the court and those advances, obligations and money borrowed must be repaid out of the debtor's property in priority to the creditors' claims.

(2) For the purpose of giving security under section 427 of the Bank Act, the interim receiver, receiver or trustee, when carrying on the business of the bankrupt, is deemed to be a person engaged in the class of business previously carried on by the bankrupt.

Rationale

The reforms are technical amendments to reflect concurrent amendments to the interim receiver provisions and the receiver provisions. The role of interim receivers is to be reduced and, as such, they will not be granted powers under this section. At the same time, the role of receivers is expected to expand. By adding receivers to the parties that may use this provision will give receivers more flexibility in carrying on their duties.

Present Law

31(1) With the permission of the court, an interim receiver or a trustee, prior to the appointment of inspectors, may make necessary or advisable advances, incur obligations, borrow money and give security on the property of the debtor in such amounts, on such terms and on such property as may be authorized by the court and those advances, obligations and money borrowed shall be repaid out of the property of the debtor in priority to the claims of the creditors.

(2) For the purpose of giving security under section 427 of the Bank Act, the trustee or interim receiver if authorized to carry on the business of the bankrupt is deemed to be a person engaged in the class of business previously carried on by the bankrupt.

Senate Recommendation

None.

Bill Clause No. 25
Section No. 33
Topic: Expenses and Disbursements

Proposed Wording

33. The court may make an order providing for the sale of any or all of the assets of the estate of the bankrupt, either by tender, private sale or public auction, setting out the terms and conditions of the sale and directing that the proceeds from the sale are to be used for the purpose of reimbursing the trustee in respect of any costs that may be owing to the trustee or of any moneys the trustee may have advanced as disbursements for the benefit of the estate.

Rationale

The reform to subsection 33(1) is technical, to clarify that the proceeds from a sale of assets ordered by the court are to be used to pay the expenses of the trustee, including disbursements.

Subsection 33(2) is repealed due to the fiduciary relationship between the trustee and the estate. A potential conflict of interest may arise in the situation where a trustee is declared to own property the trustee is administering in trust.

The BIA already provides for third party deposits and fee guarantees.

Present Law

33(1) The court may make an order providing for the sale of any or all of the assets of the estate of the bankrupt, either by tender, private sale or public auction, setting out the terms and conditions of the sale and directing that the proceeds therefrom shall be used for the purpose of reimbursing the trustee in respect of any costs that may be owing to him or of any moneys he may have advanced for the benefit of the estate.

(2) If no bid is received for the assets of the estate of the bankrupt sufficient to reimburse the trustee, the court may make an order vesting in the trustee personally all assets of the estate and on the making of the order the rights and interests of the creditors and of the bankrupt to the assets shall be determined and ended.

Senate Recommendation

None.

Bill Clause No. 26
Section No. 34 (3)
Topic: Notice

Proposed Wording

34 (3) The trustee must send notice to the Superintendent's division office of the day and time when any application for directions made under subsection (1) is to be heard and of the day and time when the trustee intends to report to the court as required by the Superintendent under subsection (2).

Rationale

The reform is intended to ensure that the Superintendent has notice of any court proceedings related to a trustee seeking directions from the court. The purpose is to provide the Superintendent with an opportunity to intervene in such circumstances so that the Superintendent may bring to the court's attention relevant information prior to directions being given.

Present Law

None.

Senate Recommendation

None.

Bill Clause No. 27
Section No. 35 (3)
Topic: Time limitation

Proposed Wording

35 (3) If a bankrupt is an individual, a notice referred to in subsection (1) is operative only during the three-month period immediately after the date of the bankruptcy unless the court, on application, extends that period on any terms that it considers fit.

Rationale

The reform is a technical amendment to modernize language.

Present Law

35 (3) Where a bankrupt is an individual, a notice referred to in subsection (1) is operative only during the three month period immediately following the date of bankruptcy unless the court, on application, extends that period on such terms as the court considers fit.

Senate Recommendation

None.

Bill Clause No. 28
Section No. 36(1)
Topic: Duty of former trustee

Proposed Wording

36 (1) On the appointment of a substituted trustee, the former trustee shall without delay pass his or her accounts before the court and deliver to the substituted trustee all the property of the estate, together with all books, records and documents of the bankrupt and of the administration of the estate, as well as a statement of receipts and disbursements that contains a complete account of all moneys received by the trustee out of the property of the bankrupt or otherwise, the amount of interest received by the trustee, all moneys disbursed and expenses incurred and the remuneration claimed by the trustee, together with full particulars, description and value of all the bankrupt's property that has not been sold or realized, setting out the reason why the property has not been sold or realized and the disposition made of the property.

Rationale

The reform is intended to clarify that where there has been the appointment of a substituted trustee, the former trustee must account for his or her own administration of the file. This amendment also adapts the section to the new procedures provided for in section 152 of the Bill that addresses the final administration of the trustees' accounts. It will provide a better understanding of the work accomplished by the trustee to relate it to the final account submitted by the Trustee.

Present Law

36 (1) On the appointment of a substituted trustee, the former trustee shall forthwith pass his accounts before the court and deliver to the substituted trustee all the property of the estate, together with all books, records and documents of the bankrupt and of the administration.

Senate Recommendation

None.

Bill Clause No. 29
Section No. 40 (1)
Topic: Disposal of unrealizable assets

Proposed Wording

40 (1) Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(d) or otherwise disclosed to the trustee before the bankrupt's discharge and that is found incapable of realization must be returned to the bankrupt before the trustee's application for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.

Rationale

The amendment of subsection (1) will provide a fair mechanism for the treatment of the bankrupt's unrealizable assets and will enhance the transparency of the administration of those assets.

Present Law

40 (1) With the permission of the inspectors, any property of a bankrupt found incapable of realization shall be returned to the bankrupt prior to the trustee's application for discharge.

Senate Recommendation

None.

BIA: Interim receivers

Clause by Clause Briefing Book

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

• Bill Clause No. 30 - BIA Section 47(1) and (2)
• Bill Clause No. 31 - BIA Section 47.1(1), (1.1) and (2)(d)
• Bill Clause No. 32 - BIA Section 47.2(3)(a)
• Bill Clause No. 33 - BIA Section 49(2)

Bill Clause No. 30
Section No. 47(1) and (2)
Topic: Interim receivers

Proposed Wording

47 (1) If the court is satisfied that a notice is about to be sent or has been sent under subsection 244(1), it may, subject to subsection (3), appoint a trustee as interim receiver of all or any part of the debtor's property that is subject to the security to which the notice relates until the earliest of

• (a) the appointment of a receiver within the meaning of subsection 243(2) in respect of any of the debtor's property,
• (b) the filing of or making of an assignment by or in respect of the debtor,
• (c) the granting of a bankruptcy order against the debtor,
• (d) the filing of or making of a proposal by or in respect of the debtor,
• (e) the filing of a notice of intention by the debtor, and
• (f) the expiry of 60 days after the appointment, or any period specified by the court.

(2) The court may direct an interim receiver appointed under subsection (1) to do any or all of the following:

• (a) take possession of all or part of the debtor's property mentioned in the appointment; and
• (b) exercise such control over that property, and over the debtor's business, as the court considers advisable.

Rationale

Interim receivers were created to protect the interests of secured creditors during the brief period between the time when a secured creditor delivers a notice that they intend to exercise their rights under a security agreement and the time when they can exercise that right (usually 10 days). This is the section 244 notice. After that period, it was intended that a receiver would be appointed. That original intention was defeated, however, as the reform to create interim receivers did not specifically limit their existence to a set period. As such, in some jurisdictions, courts have granted interim receivers wide ranging powers for interminable periods. In other jurisdictions, however, the courts have recognized the potential abuse in appointing interim receivers for extended periods with extensive powers. The difficulty that arises is that interim receivers were not made subject to the provisions in the Act regulating the conduct of receivers.

The intention of the reforms is to limit the period of an interim receiver appointment and to limit the powers that may be granted to the interim receiver.

The amendment to subsection (1) sets forth specific limits to the appointment period. The triggers that will end an appointment are the appointment of a true receiver, an event that leads to a bankruptcy, and hence the appointment of a trustee in bankruptcy who will be charged with protecting the estate, or 60 days after the appointment to force the secured creditor to either appoint a receiver or explain to the court why a new interim receiver period should be commenced. The reason 60 days was chosen rather than the 10 days of the section 244 notice was due to concerns about rules in Quebec that may require up to 60 days notice before security may be exercised.

Subsection (2)(c) was repealed to limit the powers that the Court may grant to an interim receiver.

Present Law

47 (1) Where the court is satisfied that a notice is about to be sent or has been sent under subsection 244(1), the court may, subject to subsection (3), appoint a trustee as interim receiver of all or any part of the debtor's property that is subject to the security to which the notice relates, for such term as the court may determine.

(2) The court may direct an interim receiver appointed under subsection (1) to do any or all of the following:

• (a) take possession of all or part of the debtor's property mentioned in the appointment;
• (b) exercise such control over that property, and over the debtor's business, as the court considers advisable; and
• (c) take such other action as the court considers advisable.

Senate Recommendation

The reforms accomplish the object of the Senate recommendation, which was stated to be:

The Bankruptcy and Insolvency Act be amended to clarify the role of the interim receiver, and the duration and meaning of the term "interim".

Bill Clause No. 31
Section No. 47.1(1), (1.1) and (2)(d)
Topic: Interim receiver

Proposed Wording

47.1 (1) If a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1), the court may at any time after the filing, subject to subsection (3), appoint as interim receiver of all or any part of the debtor's property,

(1.1) The appointment expires on the earliest of

• (a) the appointment of a receiver within the meaning of subsection 243(2) in respect of any of the debtor's property,
• (b) the filing of or making of an assignment by or in respect of the debtor,
• (c) the event that causes an assignment by the debtor to be deemed,
• (d) the granting of a bankruptcy order against the debtor, and
• (e) the day on which the court approves the proposal.

(2) The court may direct an interim receiver appointed under subsection (1) to do any or all of the following:

• (a) carry out the duties set out in subsection 50(10) or 50.4(7), in substitution for the trustee referred to in that subsection or jointly with that trustee;
• (b) take possession of all or part of the debtor's property mentioned in the order of the court; and
• (c) exercise such control over that property, and over the debtor's business, as the court considers advisable.

Rationale

Interim receivers were created to protect the interests of secured creditors during the brief period between the time when a secured creditor delivers a notice that they intend to exercise their rights under a security agreement and the time when they can exercise that right (usually 10 days). This is the section 244 notice. After that period, it was intended that a receiver would be appointed. That original intention was defeated, however, as the reform to create interim receivers did not specifically limit their existence to a set period. As such, in some jurisdictions, courts have granted interim receivers wide ranging powers for interminable periods. In other jurisdictions, however, the courts have recognized the potential abuse in appointing interim receivers for extended periods with extensive powers. The difficulty that arises is that interim receivers were not made subject to the provisions in the Act regulating the conduct of receivers.

The intention of the reforms is to limit the period of an interim receiver appointment and to limit the powers that may be granted to the interim receiver.

The amendment to subsection (1) sets forth specific limits to the appointment period. The triggers that will end an appointment are the appointment of a true receiver, an event that leads to a bankruptcy, and hence the appointment of a trustee in bankruptcy who will be charged with protecting the estate, or approval of a proposal, in which case the debtor has come to terms with its creditors for the repayment of debt and an interim receiver is no longer required.

Subsection (2)(d) was repealed to limit the powers that the Court may grant to an interim receiver.

Present Law

47.1 (1) Where a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1), the court may at any time thereafter, subject to subsection (3), appoint as interim receiver of all or any part of the debtor's property, for such term as the court may determine,

(2) The court may direct an interim receiver appointed under subsection (1) to do any or all of the following:

• (a) carry out the duties set out in subsection 50(10) or 50.4(7), in substitution for the trustee referred to in that subsection or jointly with that trustee;
• (b) take possession of all or part of the debtor's property mentioned in the order of the court;
• (c) exercise such control over that property, and over the debtor's business, as the court considers advisable; and
• (d) take such other action as the court considers advisable.

Senate Recommendation

The Bankruptcy and Insolvency Act be amended to clarify the role of the interim receiver, and the duration and meaning of the term "interim." As well, the definition of "receiver" should be amended to include interim receivers when they operate in a manner similar to Court-appointed receivers.

Bill Clause No. 32
Section No. 47.2(3)(a)
Topic: Interim receiver's accounts

Proposed Wording

47.2 (3) With respect to interim receivers appointed under section 46, 47 or 47.1,

• (a) the form and content of their accounts including their final statement of receipts and disbursements,,
• (b) the procedure for the preparation and taxation of those accounts, and
• (c) the procedure for the discharge of the interim receiver, shall be as prescribed.

Rationale

The reform is a technical amendment intended to clarify that the interim receiver's accounts shall include their final statement of receipts and disbursements.

Present Law

47.2 (3) With respect to interim receivers appointed under section 46, 47 or 47.1,

• (d) the form and content of their accounts,
• (e) the procedure for the preparation and taxation of those accounts, and
• (f) the procedure for the discharge of the interim receiver, shall be as prescribed.

Senate Recommendation

None.

Bill Clause No. 33
Section No. 49(2)
Topic: Sworn statement

Proposed Wording

49 (2) The assignment must be accompanied by a sworn statement in the prescribed form showing the debtor's property that is divisible among his or her creditors, the names and addresses of all his or her creditors and the amounts of their respective claims.

Rationale

The reform is a technical amendment intended to make the Act conform to current practice. The existing provision requires the debtor to determine the status of claims - whether they are secured, unsecured or preferred. This task is removed because debtors generally lack the knowledge necessary to do this and it is the trustee who makes the determination in practice.

Present Law

49 (2) The assignment made under subsection (1) shall be accompanied by a sworn statement in the prescribed form showing the property of the debtor divisible among his creditors, the names and addresses of all his creditors and the amounts of their respective claims and the nature of each, whether secured, preferred or unsecured.

Senate Recommendation

None.

BIA: Business Proposals

Clause by Clause Briefing Book

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

• Bill Clause No. 34 - BIA Section 50(2),(6)(a), (10) and (12.1)
• Bill Clause No. 35 - BIA Section 50.4(1), (2)(a), (6), (7)(c), (8)(b) and (9)
• Bill Clause No. 36 - BIA Section 50.6
• Bill Clause No. 37 - BIA Section 54(2)(a)(i), (5) and (6)

Bill Clause No. 34
Section No. 50(2),(6)(a), (10) and (12.1)
Topic: Proposal

Proposed Wording

50 (2) Subject to section 50.4, proceedings for a proposal shall be commenced, in the case of an insolvent person, by filing with a licensed trustee, and in the case of a bankrupt, by filing with the trustee of the estate,

• (a) a copy of the proposal in writing setting out the terms of the proposal and the particulars of any securities or sureties proposed, signed by the person making the proposal and the proposed sureties if any; and
• (b) the prescribed statement of affairs.

(2.1) Copies of the documents referred to in subsection (2) must, at the time the proposal is filed under subsection 62(1), also be filed by the trustee with the official receiver in the locality of the debtor.

(6)(a) a statement indicating, on a weekly basis, the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), or a revised cash-flow statement if a cash-flow statement had previously been filed under subsection 50.4(2) in respect of that insolvent person, prepared by the person making the proposal, reviewed for its reasonableness by the trustee and signed by the trustee and the person making the proposal;

(10)(a.1) send a report about the material adverse change to the creditors without delay after ascertaining the change; and

(12.1) If the court declares that the proposal is deemed to have been refused by the creditors, paragraphs 57(a) to (c) apply.

Rationale

The changes in s.50(2) are intended to increase the use of proposals. Establishing clear rules on proposals will better allow debtors to negotiate payment arrangements with creditors, ensuring that the bankruptcy process is fair to all parties involved.

The amendments to subsections (2) require the filing of a prescribed form which will bring consistency to the process of filing a proposal.

The addition of subsection (2.1) will ensure that the official receiver receives the documents referred to in subsection (2) in a timely manner.

The amendment to subsection 6(a) is intended to reflect the current practice.

The addition of subsection (10) provides transparency to the system and will provide creditors with information to determine when and whether they want to participate in the process.

The addition of subsection (12.1) provides consistency to the process by having the same result in circumstances in which the court determines that the proposal is deemed to have been refused by the creditors as if the proposal had been refused by the creditors.

Present Law

50 (2) Subject to section 50.4, proceedings for a proposal shall be commenced in the case of an insolvent person by lodging with a licensed trustee, and in the case of a bankrupt by lodging with the trustee of the estate, a copy of the proposal in writing setting out the terms of the proposal and the particulars of any securities or sureties proposed, signed by the person making the proposal and the proposed sureties if any, and

• (a) if the person in respect of whom the proposal is made is bankrupt, the statement of affairs referred to in section 158; or
• (b) if the person in respect of whom the proposal is made is not bankrupt, a statement showing the financial position of the person at the date of the proposal, verified by affidavit as being correct to the belief and knowledge of the person making the proposal.

(6)(a) a statement indicating the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), or a revised cash-flow statement where a cash-flow statement had previously been filed under subsection 50.4(2) in respect of that insolvent person, prepared by the person making the proposal, reviewed for its reasonableness by the trustee and signed by the trustee and the person making the proposal;

Senate Recommendation

None.

Bill Clause No. 35
Section No. 50.4(1), (2)(a), (6), (7)(c), (8)(b) and (9)
Topic: Notice of intention

Proposed Wording

50.4 (1) Before filing a copy of a proposal with a licensed trustee, an insolvent person may file a notice of intention, in the prescribed form, with the official receiver in the insolvent person's locality, stating

(2)(a) a statement indicating, on a weekly basis, the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), prepared by the insolvent person, reviewed for its reasonableness by the trustee under the notice of intention, and signed by the trustee and the insolvent person;

(6) Within five days after the filing of a notice of intention under subsection (1), the trustee named in the notice shall send to every known creditor, in the prescribed manner, a copy of the notice including all of the information referred to in paragraphs (1) (a) to (c).

(7)(c) shall send a report about the material adverse change to the creditors without delay after ascertaining the change.

(8)(b) the trustee shall, without delay, file with the official receiver, in the prescribed form, a report of the deemed assignment;

(8)(b.1) the official receiver shall issue a certificate of assignment, in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed under section 49; and

(9) The insolvent person may, before the expiry of the 30-day period referred to in subsection (8) or of any extension granted under this subsection, apply to the court for an extension, or further extension, as the case may be, of that period, and the court, on notice to any interested persons that the court may direct, may grant the extensions, not exceeding 45 days for any individual extension and not exceeding in the aggregate five months after the expiry of the 30-day period referred to in subsection (8), if satisfied on each application that

Rationale

The amendment to subsection (1) is a technical amendment to modernize the language.

The amendment to paragraph (2)(a) is intended to reflect the current practice.

The amendment to subsection (6) and the addition of paragraph (7)(c) are intended to add transparency to the system.

The language of paragraph 8(b) was modernized.

The addition of paragraph (8)(b.1) provides that the official receiver does not have to rely on the trustee's report before issuing the certificate of assignment.

The amendment of subsection (9) is to provide the court with discretion to whom the notice of extension of the time to file a proposal ought to be given.

Present Law

50.4 (1) Before lodging a copy of a proposal with a licensed trustee, an insolvent person may file a notice of intention, in the prescribed form, with the official receiver in the insolvent person's locality, stating

(2)(a) a statement indicating the projected cash-flow of the insolvent person (in this section referred to as the "cash-flow statement"), prepared by the insolvent person, reviewed for its reasonableness by the trustee under the notice of intention, and signed by the trustee and the insolvent person;

(6) Within five days after the filing of a notice of intention under subsection (1), the trustee named therein shall send to every known creditor, in the prescribed manner, a copy thereof.

(8)(b) the trustee shall forthwith file a report thereof in the prescribed form with the official receiver, who shall thereupon issue a certificate of assignment in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed pursuant to section 49; and

(9) The insolvent person may, before the expiration of the thirty day period mentioned in subsection (8) or any extension thereof granted under this subsection, apply to the court for an extension, or further extension, as the case may be, of that period, and the court may grant such extensions, not exceeding forty-five days for any individual extension and not exceeding in the aggregate five months after the expiration of the thirty day period mentioned in subsection (8), if satisfied on each application that

Senate Recommendation

None.

Bill Clause No. 36
Section No. 50.6
Topic: Interim Financing

Proposed Wording

50.6 (1) A court may, on the application of a debtor, other than an individual, in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1), make an order, on any conditions that the court considers appropriate, declaring that the debtor's property is subject to a security or charge in favour of any person specified in the order who agrees to lend to the debtor an amount that is approved by the court as being required by the debtor, having regard to the debtor's cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be,

• (a) for the period of 30 days after the filing of the notice of intention;
• (b) for the period of 30 days after the filing of the proposal, if no notice of intention has been filed under section 50.4 in respect of the debtor; or
• (c) for any period specified in the order, if notice of the application has been given to the secured creditors likely to be affected by the security or charge.

(2) The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the debtor.

(3) The court may, in the order, specify that the security or charge ranks in priority over any security or charge arising from a previous order made under subsection (1) only with the consent of the person in whose favour the previous order was made.

(4) In deciding whether to make the order, the court must consider, among other things,

• (a) the period the debtor is expected to be subject to proceedings under this Act;
• (b) how the debtor's business and financial affairs are to be governed during the proceedings;
• (c) whether the debtor's management has the confidence of its major creditors;
• (d) whether the loan agreement will enhance the debtor's prospects as a going concern if the proposal is approved;
• (e) the nature and value of the debtor's property;
• (f) whether any creditor will be materially prejudiced as a result of the debtor's continued operations; and
• (g) if notice of the application was given to the secured creditors, whether the debtor has provided a cash-flow statement for the period ending 120 days after the making of the application for the order.

Rationale

Interim financing provides funds to a business in financial distress to enable the business to continue to operate while it attempts to restructure its debts. The most important element is the obtaining of a priority charge by the interim lender in respect of the amount lent, thereby decreasing the lender's risk and increasing the likelihood that a willing lender can be found. The court, in determining whether to grant a priority charge, relies on factors developed through jurisprudence. The reform is generally a codification of the current practice, with additional safeguards to defend against possible abuse.

Subsection (1) provides a court with the authority to grant a charge against the property of a debtor in respect of interim financing, subject to certain limits. In the situations described in paragraphs (a) and (b), the court may only approve interim financing to meet the cash flow needs of a business for a period of 30 days from the date of the event described. In the situation described in paragraph (c), the court may approve interim financing to meet the needs of a business for a period determined by the court to be appropriate in the circumstances.

Paragraphs (a) and (b), which are not within the current practice, are safeguards intended to prevent abuse. Creditors have complained that some debtors attend court on the first day armed with an agreement with its chosen financier that provides for interim financing far in excess of the company's short-term cash flow needs and with terms that may be overly generous to the lender. Because the debtor is usually the initiator of proposal proceedings, creditors may not have notice, or insufficient notice, of the hearing to properly prepare to defend their interests at that hearing. On the other hand, a business in severe financial distress may require immediate funding to continue operating. The allowance of limited interim financing at the first hearing is intended to balance the needs of the business with the rights of creditors.

Paragraph (c) is substantially a codification of the current practice. It requires that secured creditors be given notice of the application, allowing them to defend their interests as they determine appropriate. The court should be in the best position, after hearing from the debtor and any interested creditors, to determine the appropriate period for interim financing.

Subsection (2) is the heart of the section. It provides the court with legislative authority to grant the interim lender a priority security charge above the secured interests of other creditors. It is necessary because lenders would be very reluctant to provide financing to a business in financial difficulty. The priority charge reduces the risk that the lender will suffer a loss. While the priority charge negatively affects existing creditors, it is widely accepted that interim financing enhances the ability of the business to restructure successfully, which generally results in better recovery for the creditors than a bankruptcy would.

Subsection (3) is intended to ensure that an interim lender that has taken the risk of providing financing early in the restructuring process does not have its security interest effectively shunted aside by a later lender without their consent. A later lender will have better information regarding the likelihood of a successful restructuring and can make the determination at that time whether it chooses to lend to the business. The ability of the first lender to consent to the granting of a higher priority is intended to provide greater flexibility in the process.

Subsection (4) provides the court with guidance regarding factors that should be considered prior to the granting of a priority charge under subsection (2). The described factors are largely a codification of the current jurisprudence. The intention is to provision is to ensure greater consistency, fairness and predictability in the process.

Present Law

None.

Senate Recommendation

The proposed reform follows Senate recommendation #22.

Bill Clause No. 37
Section No. 54(2)(a)(i), (5) and (6)
Topic: Equity Claims and Voting Claims

Proposed Wording

A. Replace subparagraph s.54(2)(a)(i) with the following:

• (i) all unsecured creditors, other than a creditor having a claim against the debtor arising from the rescission of a purchase or sale of a share or unit of the debtor - or a claim for damages arising from the purchase or sale of a share or unit of the debtor, and

B. Section 54 of the Act is amended by adding the following after subsection (4):

(5) Unless the court orders otherwise, a vote on a proposal may not be held until all disallowances of claims that could have an impact on the outcome of the vote have been dealt with by the court or until all appeal periods have elapsed.

(6) No person is entitled to vote on a claim acquired after the filing of a notice of intention in respect of a debtor or, if no such notice was filed, after the filing of a proposal in respect of the debtor, unless the entire claim is acquired.

Rationale

Reform A

Investors in a business willingly engage in the taking of risk - the risk of profit or loss based on the business' operations. When the investor has been fraudulently mislead into investing in a business, and for that reason has suffered a financial loss, that investor has a legal action against the company, the directors and others who were party to the deception. When the company is in financial distress, however, there may not be the means to make good the losses suffered by investors.

The intention of the reform is to put shareholders at the bottom of the priorities list. In a concurrent reform of section 140.1 of the BIA, shareholders with claims against the company for tort actions described above are explicitly placed at the bottom of the priorities list for recovery of their losses. In a proposal, unlike in bankruptcy that has a set distribution list, payment of claims is based on negotiations between the parties. Therefore, to reduce the power of shareholder claimants who might otherwise control the voting due to substantial claims, the reform removes the right of such creditors to vote on proposals. Effectively, the shareholder claimant should lose any voice in the negotiations.

Reform B

The intention of the reform is to clarify voting rights of specific creditors.

Subsection (5) is intended to ensure that creditors with disputed claims - claims that were disallowed by the trustee but for which the creditor is seeking court approval - are able to vote on a proposal put to the creditors. The amendment requires that before a vote may be held to approve a proposal, the trustee to either a) obtain court approval for the vote, or b) wait until all disputed claims are settled. The reform should ensure that creditors with disputed claims have an opportunity to make their case to the court before a vote on a proposal is made. It should provide greater fairness for creditors who believe that their claim was unduly disallowed.

Subsection (6) is intended to address a discrepancy in the existing voting rules. The Act provides that to obtain approval for a proposal, a majority of the claims holders and holders of 2/3 in value of all outstanding claims must vote in favour of that proposal. A recent trend in business insolvencies has a third party speculator purchasing portions of claims from multiple creditors. This may result in that party holding multiple claims, for each of which it may vote as creditor. Therefore, the third party may obtain an advantage by swamping the existing creditors by holding multiple claims while holding only a small part of the overall debt of the debtor. The reform will require any purchaser of a claim to purchase the entire claim. This should prevent "claim-splitting" and maintain integrity in the voting process.

Present Law

54 (1) The creditors may, in accordance with this section, resolve to accept or may refuse the proposal as made or as altered at the meeting or any adjournment thereof.

(2) For the purpose of subsection (1),

• (a) the following creditors with proven claims are entitled to vote:
  • (i) all unsecured creditors, and
  • (ii) those secured creditors in respect of whose secured claims the proposal was made;
• (b) the creditors shall vote by class, according to the class of their respective claims, and for that purpose
  • (i) all unsecured claims constitute one class, unless the proposal provides for more than one class of unsecured claim, and
  • (ii) the classes of secured claims shall be determined as provided by subsection 50(1.4);
• (c) the votes of the secured creditors do not count for the purpose of this section, but are relevant only for the purpose of subsection 62(2); and
• (d) the proposal shall be deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution.

Senate Recommendation

Reform A follows Senate recommendation #40.

The Senate made no recommendation regarding Reform B.

BIA: Business Proposals

Clause by Clause Briefing Book

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

• Bill Clause No. 38 - BIA Section 57(b)
• Bill Clause No. 39(1) - BIA Section 60(1.3)(a)
• Bill Clause No. 39(2) - BIA Section 60(1.5) and (1.6)
• Bill Clause No. 40 - BIA Section 61(2)(b)
• Bill Clause No. 41 - BIA Section 62(1) and (2)

Bill Clause No. 38
Section No. 57(b)
Topic: Refusal of proposal

Proposed Wording

57. (b) the trustee shall, without delay, file with the official receiver, in the prescribed form, a report of the deemed assignment;

(b.1) the official receiver shall issue a certificate of assignment, in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed under section 49; and

Rationale

The changes to s.57(b) will clarify the English language version of the BIA.

Subsections (b) and (b.1) streamline the process by allowing the official receiver to issue the certificate of assignment, where the creditors refuse a proposal, before the trustee's report is issued.

Present Law

57 (b) the trustee shall forthwith file a report thereof in the prescribed form with the official receiver, who shall thereupon issue a certificate of assignment in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed pursuant to section 49; and

Senate Recommendation

None.

Bill Clause No. 39(1)
Section No. 60(1.3)(a)
Topic: Unpaid Wages in Proposal

Proposed Wording

60 (1.3) No proposal in respect of an employer shall be approved by the court unless

• (a) it provides for payment to the employees and former employees, immediately after court approval of the proposal, of amounts at least equal to the amounts that they would be qualified to receive under paragraph 136(1)(d) if the employer became bankrupt on the date of the filing of the notice of intention, or proposal if no notice of intention was filed, as well as wages, salaries, commissions or compensation for services rendered after that date and before the court approval of the proposal, together with, in the case of travelling salespersons, disbursements properly incurred by them in and about the bankrupt's business during the same period; and
• (b) the court is satisfied that the employer can and will make the payments as required under paragraph (a).

Rationale

The reform is intended to ensure that unpaid wage claims are satisfied in a proposal. The provision requires that a court refuse to approve a proposal unless the proposal provides for the payment of wage claims.

Wage earners in the described situation are not entitled to payment under the Wage Earner Protection Program because the program only contemplates bankruptcies and receiverships. The reform ensures consistency of treatment between wage earners whose employer becomes bankrupt or is put into receivership and wage earners whose employer undergoes a restructuring.

Present Law

60 (1.3) No proposal in respect of an employer shall be approved by the court unless

• (a) it provides for payment to the employees and former employees, immediately after court approval of the proposal, of amounts equal to the amounts that they would be qualified to receive under paragraph 136(1)(d) if the employer became bankrupt on the date of the filing of the notice of intention, or proposal if no notice of intention was filed, as well as wages, salaries, commissions or compensation for services rendered after that date and before the court approval of the proposal, together with, in the case of travelling salesmen, disbursements properly incurred by those salesmen in and about the bankrupt's business during the same period; and
• (b) the court is satisfied that the employer can and will make the payments as required under paragraph (a).

Senate Recommendation

The reform follows Senate recommendation #20.

Bill Clause No. 39(2)
Section No. 60(1.5) and (1.6)
Topic: Pension Contributions in Proposals

Proposed Wording

60 (1.5) No proposal in respect of an employer who participates in a prescribed pension plan for the benefit of its employees shall be approved by the court unless

• (a) the proposal provides for payment of the following amounts that are unpaid to the fund established for the purpose of the pension plan:
  • (i) an amount equal to the sum of all amounts that were deducted from the employees' remuneration for payment to the fund,
  • (ii) if the prescribed pension plan is regulated by an Act of Parliament,
    • (A) an amount equal to the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that was required to be paid by the employer to the fund, and
    • (B) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985; and
  • (iii) in the case of any other prescribed pension plan,
    • (A) an amount equal to the amount that would be the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament, and
    • (B) an amount equal to the sum of all amounts that would have been required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985, if the prescribed plan were regulated by an Act of Parliament; and
• (b) the court is satisfied that the employer can and will make the payments as required under paragraph (a).

(1.6) Despite subsection (1.5), the court may approve a proposal that does not allow for the payment of the amounts referred to in that subsection if it is satisfied that the relevant parties have entered into an agreement, approved by the relevant pension regulator, respecting the payment of those amounts.

Rationale

Pension rights may form a significant portion of a wage earner's compensation from its employer, although it is deferred income. When the employer undertakes a restructuring under the proposal provisions of the BIA, debts, including those owed to a pension fund, may be compromised. For wage earners, a diminution of pension benefits would have a negative impact on future income levels.

The intention of the reform is to provide a higher priority for unremitted pension contributions. The amounts subject to the provision are (1) contributions deducted from employees' salaries but not remitted to the pension fund, (2) contributions owed by an employer for the cost of benefits offered under the pension plan, excluding amounts payable to reduce an unfunded pension liability, and (3) contributions owed by an employer to a defined contribution plan. Obligations relating to unfunded pension liabilities, including special payments or solvency payments ordered to be paid by a regulator but not remitted to the pension fund, are not intended to be captured by the reform and will not be given a higher priority. If an unfunded pension liability exists and a claim is made, it would be treated as an unsecured debt.

Because court approval is required before a proposal is finalized, prohibiting a court from approving any proposal that does not require the payment of unremitted pension contributions described above effectively grants a super-priority to the pension contribution amounts. The super-priority, however, is limited by the operation of subsection (1.6).

Subsection (1.6) provides flexibility to allow for a compromise of pension contribution obligations where the parties agree. It is expected that the provision will be used in limited circumstances where the parties agree to reduce pension benefits, which would reduce the employer's obligations. Requiring full payment of pre-filing contributions would not make sense in that circumstance.

The nature of pension regulation in Canada also affects aspects of the section - pensions may be regulated federally or provincially. The section must capture kinds of pensions described in the federal and provincial legislation. Prescribing pension plans that will be subject to this section provides greater flexibility to ensure that the appropriate pension plans are captured.

It is recognized that the reform may increase the cost, or reduce the availability, of credit for some entities; however, the limited extent of the reform should minimize its impact.

Present Law

None

Senate Recommendation

For the reasons discussed in "Rationale", Senate recommendation #21 - "The Bankruptcy and Insolvency Act not be amended to alter the treatment of pension claims" - was not followed.

Bill Clause No. 40
Section No. 61(2)(b)
Topic: Non-approval of proposal

Proposed Wording

61. (2)(b) the trustee shall, without delay, file with the official receiver, in the prescribed form, a report of the deemed assignment;

(b.1) the official receiver shall issue a certificate of assignment, in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed under section 49; and

Rationale

The amendment to subsection (b) and the addition of subsection (b.1) are intended to streamline the process since the official receiver will not have to await the trustee's report before issuing the certificate of assignment.

Present Law

61. (2) A proposal accepted by the creditors and approved by the court is binding on creditors in respect of

• (b) the trustee shall forthwith file a report thereof in the prescribed form with the official receiver, who shall thereupon issue a certificate of assignment in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed pursuant to section 49; and

Senate Recommendation

None.

Bill Clause No. 41
Section No. 62(1) and (2)
Topic: Proposals and discharge of s.178 claims

Proposed Wording

62. (1) If a proposal is made in respect of an insolvent person, the trustee shall file with the official receiver a copy of the proposal and the prescribed statement of affairs.

(2) Subject to subsection (2.1), a proposal accepted by the creditors and approved by the court is binding on creditors in respect of

• (a) all unsecured claims; and
• (b) the secured claims in respect of which the proposal was made and that were in classes in which the secured creditors voted for the acceptance of the proposal by a majority in number and two thirds in value of the secured creditors present, or represented by a proxyholder, at the meeting and voting on the resolution to accept the proposal.

(2.1) A proposal accepted by the creditors and approved by the court does not release the insolvent person from any particular debt or liability referred to in subsection 178(1) unless the proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability has assented to the proposal.

Rationale

The amendments to s.62 are intended to encourage debtors to use the proposal provisions of the BIA, as well as ensure that no s.178 creditors inadvertently release their claims by accepting a proposal.

The amendment to subsection (1) is intended to clarify the documents that have to be filed with the official receiver by the trustee.

The amendment to subsection (2) and the addition of (2.1) are intended to ensure that s. 178 protection is lost only if the creditor votes in favour of the proposal and the proposal explicitly provides for the compromise of the s. 178 claims. The potential existed for s.178 creditors to inadvertently release claims by accepting a proposal, the new wording in 2.1 will correct any ambiguity in this regard.

Present Law

62. (1) Where a proposal is made in respect of an insolvent person, the trustee shall file a copy thereof with the official receiver.

(2) A proposal accepted by the creditors and approved by the court is binding on creditors in respect of

• (a) all unsecured claims, and
• (b) the secured claims in respect of which the proposal was made and that were in classes in which the secured creditors voted for the acceptance of the proposal by a majority in number and two thirds in value of the secured creditors present, personally or by proxy, at the meeting and voting on the resolution to accept the proposal,

but does not release the insolvent person from the debts and liabilities referred to in section 178, unless the creditor assents thereto.

Senate Recommendation

The Bankruptcy and Insolvency Act be amended to ensure that an insolvent debtor will not be released from the debts and liabilities referred to in Section 178 of the Act unless the holder of those debts provides affirmative and informed consent.

BIA: Business Proposals

Clause by Clause Briefing Book

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

• Bill Clause No. 42 - BIA Section 64
• Bill Clause No. 42 - BIA Section 64.1
• Bill Clause No. 42 - BIA Section 64.2
• Bill Clause No. 43 - BIA Section 65.1 (1) and (4)(c)
• Bill Clause No. 44 - BIA Section 65.11
• Bill Clause No. 44 - BIA Section 65.12
• Bill Clause No. 44 - BIA Section 65.13
• Bill Clause No. 45 - BIA Section 66

Bill Clause No. 42
Section No. 64
Topic: Removal of Directors

Proposed Wording

64. (1) The court may, on the application of any person interested in the matter, make an order removing from office any director of a debtor in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) if the court is satisfied that the director is unreasonably impairing or is likely to unreasonably impair the possibility of a viable proposal being made in respect of the debtor or is acting or is likely to act inappropriately as a director in the circumstances.

(2) The court may, by order, fill any vacancy created under subsection (1).

Rationale

The directors of a debtor have a predominant role during the restructuring process. Unlike in a bankruptcy, the directors retain control of the debtor's assets (rather than having a receiver or trustee appointed) and also control the development of the proposal that will be put to the creditors. This is a strong position from which the directors may positively or negatively affect the restructuring process.

Under corporate law, directors have a fiduciary duty to act in the best interest of the corporation, which the courts have interpreted in the seminal Peoples case to mean to make a "better" corporation. What is meant by a "better" corporation means will vary in the individual circumstances. The remedies available to stakeholders, however, when a director fails to act in the correct manner can be both difficult and time consuming to obtain.

The Stelco CCAA proceeding brought this issue to the forefront. In that situation, the board of directors appointed two shareholder activists to fill positions left vacant prior to the CCAA filing. On application of Stelco pensioners, the bankruptcy judge ordered the appointees removed because of the perceived conflict of interest they engendered and the real risk that their appointment would poison the negotiations with other stakeholders. The Court of Appeal reversed the decision on the grounds that the CCAA does not give the court the authority to remove directors - rather, the stakeholders were required to prove oppression under corporate law. The matter is now being appealed to the Supreme Court of Canada.

The difficulties in the Stelco case show that the current legislation is neither efficient nor flexible enough to deal with real factual problems in a timely manner. The reform is intended to provide shareholders, creditors and other stakeholders with the opportunity to quickly address problematic situations.

Subsection (2) provides the court with the authority to fill any vacancy created by a removal order. The subsection is intended to address the situation where there is only one or a small number of directors or the unlikely situation where the court determines that it is in the best interest of the debtor to remove the board en masse. In these limited situations, the court may be hesitant to grant the order only because it would leave the debtor without a quorum of directors. Providing the court with the authority to fix that situation without resorting to the time consuming process of holding a shareholder meeting to elect new directors will ensure that the restructuring can continue. In addition, the court will hear from the interested parties, including respecting persons who should be appointed to fill the vacancies.

Present Law

None.

Senate Recommendation

The reform follows Senate recommendation #35.

Bill Clause No. 42
Section No. 64.1
Topic: Director's Indemnification

Proposed Wording

64.1. (1) The court may, on the application of a person in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1), make an order declaring that the assets of the person are subject to a security or charge, in an amount that the court considers appropriate, in favour of any director or officer of the person to indemnify the director or officer against obligations and liabilities that he or she may incur as a director or an officer of the person after the filing of the notice of intention or the proposal, as the case may be.

(2) The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the person.

(3) The court shall not make the order if in its opinion the person could obtain adequate indemnification insurance for the director or officer at a reasonable cost.

(4) The court shall make an order declaring that the security or charge does not apply in respect of a specific obligation or liability incurred by a director or an officer if it is of the opinion that the obligation or liability was incurred as a result of the director's or officer's gross negligence or wilful misconduct or, in the Province of Quebec, the director's gross or intentional fault.

Rationale

Directors of corporations are subject to legal liabilities created by statute and case law. While it is recognized that those who accept the responsibility of the position should do so after serious consideration of their abilities and the expectations, increasing personal liability for directors in more areas can reduce the pool of qualified candidates.

Directors and officers are confronted with significant, statutorily created personal liability, including for unpaid wages and taxes, when the business they are engaged by suffers financial difficulties. Some statutory liabilities provide for a due diligence defence but not all. Because of the risks in an insolvency situation that are out of the directors' control, many question the wisdom of acting for a company during a restructuring. In some instances, directors have resigned en masse rather than accept the liability - leaving the business without experienced direction or control when it needs it most.

The purpose of the reform is to provide directors and officers with greater protection against personal liability that may arise due to circumstances beyond their control in an insolvency proceeding. During a restructuring, companies often suffer restricted cash flow making it difficult for the directors and officers to ensure that all parties are paid. By providing directors with indemnification under specific circumstances, more directors should be willing to continue to act, which would increase the likelihood of a successful restructuring.

Subsection (1) provides certain limits to the indemnity. First, the amount of an indemnity is subject to court determination to ensure that other creditors are not unfairly prejudiced by a conservative approach taken by the debtor for the directors' protection. Allowing the company to determine the appropriate indemnity would result in a conflict of interest, as the directors would effectively have the ability to protect themselves. Second, the indemnity only applies in respect of obligations or liabilities incurred after the date of a filing. The restriction should force directors to act quickly to address the company's financial problems.

Subsection (2) provides the court with the ability to determine the priority of the security charge.

Subsection (3) limits the circumstances in which a court could grant an indemnity against the property of the debtor. Where directors' and officers' insurance is available, that option would almost always be the preferred choice, however, some D&O insurance policies either eliminate or restrict coverage after an insolvency filing. Therefore, there may be few choices but for the directors to seek the statutory indemnity.

Subsection (4) restricts the indemnity to circumstances where the directors and officers have acted with due regard to their duties. A finding of a court that an obligation or liability arose due to the director's or officer's gross negligence or wilful misconduct would negate the ability of that person to access the indemnity. The provision is open ended to allow any party interested to bring an application, or a court acting of its own accord, to challenge the standard of conduct of the director or officer.

Present Law

None.

Senate Recommendation

Senate recommendation #25 proposed a general due diligence defence against personal liability for directors. The creation of an indemnification process for directors and officers, coupled with the specified limitations, addressed the Senate concerns regarding directors' liability while simplifying the process.

Bill Clause No. 42
Section No. 64.2
Topic: Professionals' Costs

Proposed Wording

64.2. (1) The court may make an order declaring that property of a person, other than an individual, in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) is subject to a security or charge, in an amount that the court considers appropriate, in respect of

• (a) the costs of the interim receiver, the receiver-manager and the trustee, including their legal costs;
• (b) the person's costs incurred in relation to the remuneration and expenses of any financial, legal or other experts engaged by the person for the purpose of any proceedings under this Division; and
• (c) the costs of any interested party incurred in relation to the remuneration and expenses of any financial, legal or other experts engaged by the party, if the court is satisfied that the incurring of those costs is necessary for the effective participation of the interested party in the proceedings under this Division in relation to the person.

(2) The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the person.

Rationale

The process of preparing a proposal under the BIA can be a time consuming and expensive proposition for all of the parties involved. To obtain an agreement requires negotiations between the debtor, creditors and other stakeholders. To negotiate, the parties may require financial, legal and other expertise to assist them. The expense of engaging such professionals may be beyond the resources of many stakeholders, including unions or employee groups, pensioners and trade creditors. Stakeholders without the necessary resources may be unable to participate effectively, thereby reducing their ability to protect their interests.

The intention of the reform is to ensure effective participation of interested stakeholders - either directly, if they are large creditors, or indirectly as part of a creditors' group or stakeholders group. It is expected that the court will limit the application of this provision to situations where a group of small creditors may be jointly represented rather than allow each creditor to engage their own experts at the debtor's expense.

Subsection (1) provides the court with legislative authority to grant certain parties a priority charge over the assets of an entity that has commenced proceedings respecting a proposal. Paragraph (a) provides for interim receivers, receiver-managers and trustees, each of who may initiate, and partake in the negotiations of, a proposal on behalf of the debtor, if appointed to do so. Paragraph (b) provides for the cost of the debtor's own legal and financial professionals. Because the debtor is cash-restricted and may be unable to pay its ongoing obligations, professionals would be unlikely to act for the debtor without some guarantee of payment. These professionals regularly receive a priority charge in CCAA proceedings. Paragraph (c) provides for third party's professional costs to be paid. Stakeholder groups have stated that small creditors tend not to be well represented during negotiations because the cost of engaging professionals is too high. The reform is intended to increase the ability of more creditors to act. Subsection (2) provides the court with the ability to determine the priority of the security charge.

Present Law

None.

Senate Recommendation

None.

Bill Clause No. 43
Section No. 65.1 (1) and (4)(c)
Topic: Ipso Facto Clauses

Proposed Wording

65.1 (1) If a notice of intention or a proposal has been filed in respect of an insolvent person, no person may terminate or amend any agreement, including a security agreement, with the insolvent person, or claim an accelerated payment, or a forfeiture of the term, under any agreement, including a security agreement, with the insolvent person, by reason only that

(4)(c) as preventing a lessor of aircraft objects under an agreement with the insolvent person from taking possession of the aircraft objects

• (i) if, after the commencement of proceedings under this Act, the insolvent person defaults in protecting or maintaining the aircraft objects in accordance with the agreement,
• (ii) 60 days after the commencement of proceedings under this Act unless, during that period, the insolvent person
  • (A) remedied the default of every other obligation under the agreement, other than a default constituted by the commencement of proceedings under this Act or the breach of a provision in the agreement relating to the insolvent person=s financial condition,
  • (B) agreed to perform the obligations under the agreement, other than an obligation not to become insolvent or an obligation relating to the insolvent person=s financial condition, until the day on which proceedings under this Act end, and
  • (C) agreed to perform all the obligations arising under the agreement after the proceedings under this Act end, or
• (iii) if, during the period that begins on the expiry of the 60-day period and ends on the day on which proceedings under this Act end, the insolvent person defaults in performing an obligation under the agreement, other than an obligation not to become insolvent or an obligation relating to the insolvent person's financial condition.

Rationale

The amendment to subsection (1) makes it clear that the protection against the impact of ipso facto clauses, which purport to entitle the termination of an agreement on the basis of the filing of notice of intention or a proposal, also applies to security agreements. This change should end potential abuse of ipso facto clauses, where contracts were being cancelled only because of the insolvent event, and not for any breach in performance of the contract.

The addition of subsection (4)(c) will allow for obligations made under the Act to Implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment to be met. Specifically, (4)(c) makes it clear that the stay of proceeding under the BIA does not apply to lessors of aircraft objects 1) if the debtor fails to protect or maintain the object in accordance with the agreement, 2) after 60 days following the beginning of the proceedings unless the debtor has remedied all defaults under the agreement or 3) after 60 days if the debtor goes into default. This provision is important because aircraft are usually leased as opposed to purchased.

Present Law

65.1(1) If a notice of intention or a proposal has been filed in respect of an insolvent person, no person may terminate or amend any agreement with the insolvent person, or claim an accelerated payment, or a forfeiture of the term, under any agreement with the insolvent person, by reason only that

Senate Recommendation

The Senate recommended that the Bankruptcy and Insolvency Act be amended to provide that ipso facto clauses in agreements for basic services be non-enforceable with respect to consumer proposals and consumer bankruptcies.

Bill Clause No. 44
Section No. 65.11
Topic: Disclaimer of Agreements

Proposed Wording

65.11. (1) A debtor, other than an individual, in respect of whom a notice of intention has been filed under section 50.4 or a proposal has been filed under subsection 62(1) may, subject to subsection (3), disclaim or resiliate any agreement to which the debtor is a party on the date the notice of intention or the proposal was filed by giving 30 days notice to the other parties to the agreement in the prescribed manner.

(2) Subsection (1) does not apply in respect of

• (a) an eligible financial contract within the meaning of subsection 65.1(8);
• (b) a lease referred to in subsection 65.2(1);
• (c) a collective agreement; (d) a financing agreement if the debtor is the borrower; and (e) a lease of real property or an immovable if the debtor is the lessor.

(3) Within 15 days after being given notice of the disclaimer or resiliation, a party to the agreement may apply to the court for a declaration that subsection (1) does not apply in respect of the agreement, and the court, on notice to any parties that it may direct, shall, subject to subsection (4), make that declaration.

(4) No declaration under subsection (3) shall be made if the court is satisfied that a viable proposal could not be made in respect of the debtor without the disclaimer or resiliation of the agreement and all other agreements that the debtor has disclaimed or resiliated under subsection (1) or 65.2(1).

(5) If the debtor has, in any agreement, granted the use of any intellectual property to a party to the agreement, the disclaimer or resiliation of the agreement does not affect the party's right to use the intellectual property so long as that party continues to perform its obligations in relation to the use of the intellectual property.

(6) If an agreement is disclaimed or resiliated, every other party to the agreement is deemed to have a claim for damages as an unsecured creditor.

Rationale

When a debtor enters the restructuring process under the BIA proposal provisions, it is necessary for it to negotiate a reduction of its debts and obligations with its creditors. Among the obligations that the debtor may seek to renegotiate are ongoing agreements.

The intention of the reform is to allow debtors to be freed from unwanted and burdensome agreements that make up part of the financial distress experienced by the debtor. The agreements may be the result of poor negotiations, poor planning or unforeseen circumstances; however, the result is the weighing down of the debtor by unsound commitments. To successfully emerge from restructuring, the debtor may need to rid itself of some agreements.

The debtor will be entitled to unilaterally terminate agreements, subject to specific limitations. This ability to act unilaterally differs from normal process that requires negotiating, however, the provision is balanced by granted to the injured third parties a claim for damages resulting from the disclaimer.

Subsection (2) specifies certain agreements that may not be unilaterally disclaimed by the debtor. Paragraphs (a), (b) and (c) refer to agreements that are subject to special treatment under the BIA. Paragraphs (d) and (e) refer to agreements that have been specifically excluded because the effect of disclaimer on co-parties to those agreements could be grievous. For example, without paragraph (e), an apartment building landlord making a proposal could be entitled to evict all of its residential tenants. While that may assist the restructuring of the landlord debtor, its societal effects would be heinous.

Subsection (3) provides the third party with the right to challenge a disclaimer by application to the court.

Subsection (4) provides the test to determine if a court should grant the declaration under subsection (3). The test requires the court to determine whether it is necessary for the contracts being disclaimed to actually be disclaimed for the purposes of a successful restructuring. It is expected that the courts will refuse blanket disclaimers and require the debtor to show, at least to a minimal standard of evidence, that the disclaimer is required for it to emerge from the proceedings with a viable business.

Subsection (5) is intended to address the issue of intellectual property licenses. If a debtor is entitled to disclaim agreements in which the debtor is the licensor of intellectual property, the licensees may be grievously harmed. In the United States, a similar approach is taken - the licensor must allow the licensee to continue to use the intellectual property provided the licensee continues to meet it obligations relating to the use.

Subsection (6) provides parties to a disclaimed agreement with the right to a claim for damages arising from the disclaimer.

Present Law

Section 65.2 of the BIA provides that a debtor may disclaim or resiliate a commercial lease. There is no law regarding other types of agreements.

Senate Recommendation

The reform follows Senate recommendation #30.

Bill Clause No. 44
Section No. 65.12
Topic: Collective Agreements

Proposed Wording

(1) An insolvent person in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(1) who is a party to a collective agreement and who is unable to reach a voluntary agreement with the bargaining agent to revise any of its provisions may, on giving five days notice to the bargaining agent, apply to the court for an order authorizing the insolvent person to serve a notice to bargain under the laws of the jurisdiction governing collective bargaining between the insolvent person and the bargaining agent.

(2) The court may issue the order only if it is satisfied that

• (a) the insolvent person would not be able to make a viable proposal, taking into account the terms of the collective agreement;
• (b) the insolvent person has made good faith efforts to renegotiate the provisions of the collective agreement; and
• (c) the failure to issue the order is likely to result in irreparable damage to the insolvent person.

(3) The vote of the creditors in respect of a proposal may not be delayed solely because the period provided in the laws of the jurisdiction governing collective bargaining between the insolvent person and the bargaining agent has not expired.

(4) If the parties to the collective agreement agree to revise the collective agreement after proceedings have been commenced under this Act in respect of the insolvent person, the bargaining agent that is a party to the agreement has a claim, as an unsecured creditor, for an amount equal to the value of concessions granted by the bargaining agent with respect to the remaining term of the collective agreement.

(5) On the application of the bargaining agent and on notice to the person to whom the application relates, the court may, subject to any terms and conditions it specifies, make an order requiring the person to make available to the bargaining agent any information specified by the court in the person's possession or control that relates to the insolvent person's business or financial affairs and that is relevant to the collective bargaining between the insolvent person and the bargaining agent. The court may make the order only after the insolvent person has been authorized to serve a notice to bargain under subsection (1).

(6) For greater certainty, any collective agreement that the insolvent person and the bargaining agent have not agreed to revise remains in force.

(7) For the purpose of this section, the parties to a collective agreement are the insolvent person and the bargaining agent who are bound by the collective agreement.

Rationale

Collective agreements set out the framework for unionized employees. When the employer faces financial difficulties and enters restructuring proceedings, it is common for the employer to review its employee costs, as it may be a significant portion of its expenses. The difficulty lies, however, in maintaining a balance between the interests of the employer's restructuring and the employees.

The intention of the reform is to ensure that the balance is maintained by placing any negotiations into the context of labour law, rules that both the employer and union understand and with which they are comfortable. This should improve likelihood of success of any negotiations.

Subsection (1) provides that a debtor may apply to the court for an order authorizing the debtor to serve a "notice to bargain" under the applicable labour laws (provincial or federal, as the case may be) to the union's bargaining agent. A "notice to bargain" is a document that, under labour law, initiates collective bargaining. A court order is required because labour law stipulates specific periods when a notice to bargain may be served.

Subsection (2) sets conditions that must be met before a court may grant the order referred to in subsection (1). Paragraph (a) provides a standard test - that the action must be measured against the likelihood that it will further the restructuring aims. The test requests the court to balance the possible harm done to one party against the likely advantage gained by all parties to determine if the action should be taken. Paragraph (b) provides a check on the activity of the debtor. It is an equitable test requiring the debtor to appear before the court with "clean hands" - that the debtor is acting in good faith. Paragraph (c) requires the debtor to satisfy the court that the order is required for a viable restructuring. Where paragraph (a) is limited to having the court balance the interests of different stakeholders, paragraph (c) requires the court to consider the position of the debtor itself. Collectively, the three conditions that must be met require the court to consider the needs of all parties in a restructuring before granting the order referred to in subsection (1).

Subsection (3) is intended to clarify that the bankruptcy court maintains control of the restructuring. Because collective bargaining falls under the rules of provincial or federal labour relations, each with its time frames and requirements, it may have been misconstrued that the restructuring could not continue until labour negotiations were completed under the relevant rules. It is vital, however, that a restructuring is not postponed while dealing with labour issues. The debtor may continue to negotiate with other parties and may prepare a proposal to bring to its creditors before the time periods set out in the relevant labour law expire. The subsection provides the court with the authority to order a creditor vote on a proposal at the court's discretion. In conjunction with subsection (6), however, if the labour negotiations are ongoing, the existing collective agreement must be respected.

Subsection (4) provides the bargaining agent with the right to claim against the debtor as damages any concessions granted during negotiations with the debtor, whether or not the negotiations were ordered under subsection (1). The claim would be as an unsecured creditor. Other parties to agreements with the debtor, which agreements are disclaimed under section 65.11, have a claim for damages.

Subsection (5) provides that a bargaining agent may apply to the court for an order compelling a person with information regarding the debtor's business and financial affairs to provide that information to the bargaining agent. Unions have stated that they often lack information necessary to effectively bargain on behalf of the employees. Business and financial information publicly available is often out-dated. The court has been granted authority to limit the information that must be provided or impose conditions on its release to ensure public market security. It is expected that courts will impose confidentiality of the information and strict trading prohibitions where the debtor is a publicly traded company.

Subsection (6) is intended to clarify that the court does not have the authority to unilaterally impose an amended collective agreement upon the parties. The subsection clearly provides that the power should not be read into the BIA.

Present Law

Senate Recommendation

None.

Bill Clause No. 44
Section No. 65.13
Topic: Sale of Assets

Proposed Wording

(1) An insolvent person, other than an individual, in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(1) may not sell or otherwise dispose of assets outside the ordinary course of business unless authorized to do so by a court.

(2) An insolvent person who applies to the court for the authorization must give notice of the application to all secured creditors who are likely to be affected by the proposed sale or disposal of the assets to which the application relates.

(3) In deciding whether to grant the authorization, the court must consider, among other things,

• (a) whether the process leading to the proposed sale or disposal of the assets was reasonable in the circumstances;
• (b) whether the trustee approved the process leading to the proposed sale or disposal of the assets;
• (c) whether the trustee has filed with the court a report stating that in his or her opinion the sale or disposal of the assets is necessary for a viable proposal that will provide a better result for creditors than if the assets were sold or disposed of under a bankruptcy;
• (d) the extent to which the creditors were consulted in respect of the proposed sale or disposal;
• (e) the effects of the proposed sale or disposal on creditors and other interested parties; and
• (f) whether the consideration to be received for the assets is reasonable and fair, taking into account the market value of the assets.

(4) In addition to taking the factors referred to in subsection (3) into account, if the proposed sale or disposal is to a person who is related to the insolvent person, the court may grant the authorization only if it is satisfied that

• (a) good faith efforts were made to sell or dispose of the assets to persons who are not related to the person proposing to sell or dispose of them; and
• (b) the consideration to be received is superior to the consideration that would be received under all other offers actually received in respect of the assets.

(5) For the purpose of subsection (4), a person who is related to the insolvent person includes a person who controls the insolvent person, a director or an officer of the insolvent person and a person who is related to a director or an officer of the insolvent person.

(6) In granting an authorization for the sale or disposal of assets, the court may order that the assets may be sold or disposed of free and clear of any security, charge or other restriction, but if it so orders, it shall also order that the proceeds realized from the sale or disposal of the assets are subject to a security, charge or other restriction in favour of the creditors whose security, charges or other restrictions are affected by the order.

Rationale

When a debtor is engaged in proceedings under the BIA, the provisions of the BIA grant a stay of other proceedings. Secured creditors are unable to act upon their security and other creditors are unable to seek redress from the courts. The reform is intended to provide the debtor with greater flexibility in dealing with its property while limiting the possibility of abuse.

Subsection (1) sets out the basic prohibition against a debtor selling or disposing of its assets out of the ordinary course of business without court approval.

Subsection (2) requires that secured creditors be given notice of the application to allow the secured creditor the opportunity to oppose the order should they determine it necessary to protect their interests.

Subsection (3) sets out the factors the court must consider before granting the order to sell the property. It provides legislative guidance for the court and provides direction for the debtor. The provision should improve consistency of judicial decisions.

Subsection (4) is intended to prevent the possible abuse by "phoenix corporations". Prevalent in small business, particularly in the restaurant industry, phoenix corporations are the result of owners who engage in serial bankruptcies. A person incorporates a business and proceeds to cause it to become bankrupt. The person then purchases the assets of the business at a discount out of the estate and incorporates a "new" business using the assets of the previous business. The owner continues their original business basically unaffected while creditors are left unpaid.

Subsection (5) expands the definition of "related person" for the purposes of the section to address corporations.

Subsection (6) provides that a court may order that the property be sold to the purchaser free and clear of charges, liens and restrictions of any kind. The provision will increase the value of the property thereby creating greater wealth for the estate while also increasing the likelihood that property will be returned to productive use quickly. The interests of the secured creditor is protected by the requirement that the consideration received be subject to the same charges, liens or restrictions as the original property.

For example, a lumber mill may be subject to a lien for municipal taxes in an amount in excess of the market value of the lumber mill. Because the lien is attached to the property, a purchaser for value would be subject to the lien. The property could not be sold because it has a negative value. If a court has the authority to remove the lien, the lumber mill could be sold at market value and be put into production by the purchaser. At the same time, the consideration received would be subject to the original lien. The reform should increase efficiency in the insolvency system.

Present Law

Senate Recommendation

The reform follows Senate recommendation #34, however, the reform does not provide that provincial Bulk Sales legislation be overridden.

Bill Clause No. 45
Section No. 66
Topic: Application to Proposals etc.

Proposed Wording

66. (1.1) For the purposes of subsection (1), in deciding whether to make an assignment under subsection 84.1(1), the court must, in addition to the factors referred to in subsection 84.1(4), also consider whether the insolvent person would not be able to make a viable proposal without the assignment.

(1.2) For the purposes of subsection (1), the trustee is to prepare the final statement of receipts and disbursements referred to in section 151 without delay after

• (a) the debtor files or is deemed to have filed an assignment;
• (b) the trustee informs the creditors and the official receiver of a default made in the performance of any provision in a proposal; or
• (c) the trustee gives the certificate referred to in section 65.3 in respect of the proposal.

(1.3) For the purposes of subsection (1), the examination under oath by the official receiver under subsection 161(1) is to be held, on the attendance of the person who has filed a notice of intention under section 50.4 or a proposal, before the proposal is approved by the court or the person becomes bankrupt.

Rationale

The reform is a technical amendment to clarify the requirements of specific provisions in the Act. Section 66 acts as an explanatory provision. It states that all provisions of the Act apply to Division I proposals even where the provision only expressly speaks to bankruptcy situations. The reforms are intended to clarify how the general rule of section 66 applies in specific circumstances relating to proposals.

Present Law

Senate Recommendation

None.

BIA: Consumer Proposals

Clause by Clause Briefing Book

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

• Bill Clause No. 46 - BIA Section 66.11
• Bill Clause No. 47 - BIA Section 66.12(2)
• Bill Clause No. 48 - BIA Section 66.13(2)(d)
• Bill Clause No. 49 - BIA Section 66.14(a)(iii) and (b)(i)
• Bill Clause No. 50 - BIA Section 66.17(2)
• Bill Clause No. 51 - BIA Section 66.28(2)
• Bill Clause No. 52 - BIA Section 66.31

Bill Clause No. 46
Section No. 66.11
Topic: Definition of Consumer Debtor

Proposed Wording

66.11 "consumer debtor" means an individual who is bankrupt or insolvent and whose aggregate debts, excluding any debts secured by the individual's principal residence, are not more than $250,000 or any other prescribed amount;

Rationale

This change to the definition of "consumer debtor" increases the amount of debts that an individual may have to be eligible to make a consumer proposal from $75,000 to $250,000. This new debt ceiling appears in the Act rather than in the Rules in an effort to maintain transparency about this sizeable increase. It is believed that the current indebtedness ceiling of $75,000 is too low and forces many self-employed individuals and higher-income debtors to make a more costly and more complicated commercial proposal. The higher costs associated with a commercial proposal translate to a reduced recovery for creditors. In addition, failure of a commercial proposal results in an automatic bankruptcy, whereas failure of a consumer proposal does not. The increase in the indebtedness ceiling will channel more debtors into the simpler and more cost-effective consumer proposal scheme.

Present Law

66.11 "consumer debtor" means a natural person who is bankrupt or insolvent and whose aggregate debts, excluding any debts secured by the person's principal residence, do not exceed seventy-five thousand dollars or such other maximum as is prescribed;

Senate Recommendation

The proposed reform follows the Senate Committee's recommendation in part. The Senate recommendation called for an increase in the indebtedness threshold to $100,000, with annual increases thereafter to reflect increases in the cost of living as measured by the Consumer Price Index.

None.

Bill Clause No. 47
Section No. 66.12(2)
Topic: Restriction for proposals

Proposed Wording

66.12. (2) A consumer debtor who has filed a notice of intention or a proposal under Division I may not make a consumer proposal until the trustee appointed in respect of the notice of intention or proposal under Division I has been discharged.

Rationale

The English version of subsection 66.12(2) has been modernized.

Present Law

66.12. (2) A consumer debtor who has filed a notice of intention or lodged a proposal under Division I may not make a consumer proposal until the trustee appointed in respect of the notice of intention or proposal under Division I has been discharged.

Senate Recommendation

None.

Bill Clause No. 48
Section No. 66.13(2)(d)
Topic: Documents to be filed

Proposed Wording

66.13. (2)(d) subject to subsection (3), file with the official receiver a copy of the consumer proposal, signed by the consumer debtor, and the prescribed statement of affairs.

Rationale

The amendment to subsection (2)(d) is intended to make it clear that a consumer proposal must be accompanied by a prescribed statement of affairs.

Present Law

66.13. (2)(d) subject to subsection (3), file a copy of the consumer proposal, signed by the consumer debtor, with the official receiver.

Senate Recommendation

None.

Bill Clause No. 49
Section No. 66.14(a)(iii) and (b)(i)
Topic: Documents to be filed

Proposed Wording

66.14. (a) prepare and file with the official receiver a report in the prescribed form setting out

• (i) the results of the investigation made under paragraph 66.13(2)(a),
• (ii) the administrator's opinion as to whether the consumer proposal is reasonable and fair to the consumer debtor and the creditors, and whether the consumer debtor will be able to perform it, and
• (iii) [repealed,] and
• (iv) a list of the creditors whose claims exceed two hundred and fifty dollars; and

(b) send to every known creditor, in the prescribed form and manner,

• (i) a copy of the consumer proposal and a copy of the statement of affairs referred to in paragraph 66.13(2)(d),

Rationale

Subsection (a)(iii) was repealed and the information that was required to be provided is reworked in subparagraph (b)(i).

Subsection (b)(i) is intended to make it clear that a consumer proposal must be accompanied by a prescribed statement of affairs. This change will ensure consistency in the way in which the information is presented.

Present Law

66.14 The administrator shall, within ten days after filing a consumer proposal with the official receiver,

• (a) prepare and file with the official receiver a report in the prescribed form setting out
• (i) the results of the investigation made under paragraph 66.13(2)(a),
• (ii) the administrator's opinion as to whether the consumer proposal is reasonable and fair to the consumer debtor and the creditors, and whether the consumer debtor will be able to perform it,
• (iii) a condensed statement of the consumer debtor's assets, liabilities, income and expenses, and
• (iv) a list of the creditors whose claims exceed two hundred and fifty dollars; and
• (b) send to every known creditor, in the prescribed form and manner,
• (i) a copy of the consumer proposal,

Senate Recommendation

None.

Bill Clause No. 50
Section No. 66.17(2)
Topic: Effect of assent or dissent

Proposed Wording

66.17. (2) Unless it is rescinded, any assent or dissent received by the administrator at or before a meeting of creditors has effect as if the creditor had been present and had voted at the meeting.

Rationale

The amendment of subsection (2) streamlines the process by removing the obligation that a meeting of creditors be held when there is a dissent received by the administrator to the consumer proposal.

Present Law

66.17. (2) Any dissent received by the administrator prior to the expiration of the forty-five day period mentioned in subsection (1) is deemed to be a request for a meeting of creditors for the purpose of paragraph 66.15(2)(b), and any assent or dissent received by the administrator at or prior to a meeting of creditors has effect as if the creditor had been present and had voted at the meeting.

Senate Recommendation

The Bankruptcy and Insolvency Act be reviewed in order to identify opportunities that will contribute to greater efficiency within the insolvency system, including efforts regarding the adoption of new technologies.

Bill Clause No. 51
Section No. 66.28(2)
Topic: Inadvertent Discharge of Section 178 (1) Claims

Proposed Wording

66.28. (2) Subject to subsection (2.1), a consumer proposal accepted, or deemed accepted, by the creditors and approved, or deemed approved, by the court is binding on creditors in respect of

• (a) all unsecured claims; and
• (b) secured claims for which proofs of claim have been filed in the manner provided for in sections 124 to 134.

(2.1) A consumer proposal accepted, or deemed accepted, by the creditors and approved, or deemed approved, by the court does not release the consumer debtor from any particular debt or liability referred to in subsection 178(1) unless the consumer proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability has assented to the consumer proposal.

Rationale

The current wording in subsection (2) is ambiguous with respect to the meaning of the phrase "assents thereto", the amendment will clarify this phrase. The courts have historically interpreted "assents thereto" to refer to the proposal. Thus, when a creditor with a claim under subsection 178 (1) agrees to the proposal, the creditor also agrees, perhaps inadvertently, to a release of the claim under subsection 178 (1).

The new wording under subsection 68.28 (2.1) clarifies the ambiguity and will protect creditors from unknowingly or inadvertently relinquishing their otherwise undischargeable claims.

This correction will enhance fairness in the process by allowing these claimants to be informed participants without risking an unintentional compromise of their claims. Especially vulnerable in this area are child and spousal support recipients with claims for arrears, victims of fraud and holders of an award for damages as a result of intentional bodily harm. With the revised wording, the creditor's claim under subsection 178 (1) will be discharged only if the creditor votes in favour of a proposal that specifically provides for the compromise of the section 178 claim, thus eliminating any ambiguity.

Present Law

66.28. (2) A consumer proposal accepted, or deemed accepted, by the creditors and approved, or deemed approved, by the court is binding on creditors in respect of

• (a) all unsecured claims, and
• (b) secured claims for which proofs of claim have been filed in the manner provided for in sections 124 to 134,

but does not release the consumer debtor from the debts and liabilities referred to in section 178, unless the creditor assents thereto.

Senate Recommendation

None.

Bill Clause No. 52
Section No. 66.31
Topic: Consumer Proposal Default

Proposed Wording

66.31. (1) Unless the court has previously ordered otherwise or unless an amendment to the consumer proposal has previously been filed, a consumer proposal is deemed to be annulled on

• (a) in the case when payments under the consumer proposal are to be made monthly or more frequently, the day on which the consumer debtor is in default for an amount that is equal to or more than the amount of three payments; or
• (b) in the case when payments under the consumer proposal are to be made less frequently than monthly, the day that is three months after the day on which the consumer debtor is in default in respect of any payment.

(2) If an amendment to a consumer proposal filed before the deemed annulment of the consumer proposal under subsection (1) is withdrawn or refused by the creditors or the court, the consumer proposal is deemed to be annulled on the day on which the amendment is withdrawn or refused.

(3) Without delay after a consumer proposal is deemed to be annulled, the administrator shall

• (a) file with the official receiver, in the prescribed form, a report in relation to the deemed annulment; and
• (b) send a notice to the creditors informing them of the deemed annulment.

(4) When a consumer proposal made by a bankrupt is deemed to be annulled,

• (a) the consumer debtor is deemed to have made an assignment on the date of the deemed annulment;
• (b) the trustee who is the administrator of the consumer proposal shall, within five days after the deemed annulment, send notice of the meeting of creditors under section 102, at which meeting the creditors may by ordinary resolution, despite section 14, affirm the appointment of the trustee or appoint another trustee in lieu of that trustee; and
• (c) the trustee shall, without delay, file with the official receiver, in the prescribed form, a report of the deemed annulment and the official receiver shall, without delay, issue a certificate of assignment, in the prescribed form, which has the same effect for the purposes of this Act as an assignment filed under section 49.

(5) A deemed annulment of a consumer proposal does not prejudice the validity of any sale, disposition of property or payment duly made, or anything duly done under or in pursuance of the consumer proposal, and despite the deemed annulment, a guarantee given under the consumer proposal remains in full force and effect in accordance with its terms.

(6) If the administrator, in the case of a deemed annulment of a consumer proposal made by a person other than a bankrupt, considers it appropriate to do so in the circumstances, he or she may, with notice to the official receiver, send to the creditors, within 10 days after the day on which the consumer proposal was deemed to be annulled, a notice in the prescribed form informing them that the consumer proposal will be automatically revived 45 days after the day on which it was deemed to be annulled unless one of them files with the administrator a notice of objection, in the prescribed manner, to the revival.

(7) If the notice is sent by the administrator and no notice of objection is filed during the 45-day period, the consumer proposal is automatically revived on the expiry of those 45 days.

(8) If a notice of objection is filed with the administrator during the 45-day period, the administrator must, without delay, send to the official receiver and to each creditor a notice in the prescribed form informing them that the consumer proposal is not going to be automatically revived on the expiry of the 45-day period.

(9) The administrator may at any time apply to the court, with notice to the official receiver and the creditors, for an order reviving any consumer proposal of a consumer debtor who is not a bankrupt that has been deemed to be annulled, and the court, if it considers it appropriate to do so in the circumstances, may make an order reviving the consumer proposal, on any terms that the court considers appropriate.

(10) Without delay after a consumer proposal is revived, the administrator shall

• (a) file with the official receiver, in the prescribed form, a report in relation to the revival; and
• (b) send a notice to the creditors informing them of the revival.

(11) The revival of a consumer proposal does not prejudice the validity of anything duly done--between the day on which the consumer proposal is deemed to be annulled and the day on which it is revived--by a creditor in the exercise of any rights revived by subsection 66.32(2).

Rationale

This proposed change sets out the rules by which a consumer proposal is deemed to be annulled and the process by which it can be revived. The proposal provides the administrator with the discretion to revive a consumer proposal that has been deemed annulled under subsection 66.31(1).

Currently, there is no way to revive a consumer proposal that is in default. Once the consumer proposal is in default, the administrator and the courts have no flexibility, and the consumer proposal is deemed annulled. Defaults in the agreement can only be remedied by a court order made prior to the deemed annulment by way of an amendment to the proposal previously agreed to by the creditors. The new section will allow an administrator to rectify the default by providing notice to the creditors. It is especially beneficial in situations where the debtor faces a temporary problem meeting payments, for example, due to illness or temporary unemployment, but otherwise is making good faith efforts to comply with the terms of the proposal.

The ability to revive a consumer proposal that is deemed to be annulled benefits all stakeholders if the proposal is still viable and can be completed despite the default in payments. This process continues to retain the principle of accountability to the creditors through notice provisions, and creditors have the opportunity to object to the revival. The creditors' rights to the amount of their claims less any dividends received are revived between the day on which the proposal is deemed to be annulled and the day on which it is revived-a period of 45 days.

Subsection (1) clarifies that the consumer proposal is deemed to be annulled the day on which the debtor is in default for an amount that is equal to or more than the amount of three payments, in cases where payments are to be made monthly, or the day that is three months after the day on which the debtor is in default in respect of any payment in cases where payments are to be made less frequently than monthly.

Subsection (2) also clarifies that the consumer proposal is deemed to be annulled the day on which any amendment filed prior to the dates mentioned in subsection (1) is withdrawn or refused by the creditors or the court.

Subsection (3) sets out the duties of the administrator in the event of a deemed annulment, i.e., to file a report with the official receiver and to send a notice to the creditors.

Subsection (4) sets out what happens in the specific case when a consumer proposal that is made by a bankrupt is deemed to be annulled. In this case, (a) the debtor is deemed to have made an assignment on the date of the deemed annulment; (b) the trustee who is the administrator of the consumer proposal shall within 5 days send notice of a meeting of creditors. At the meeting, the creditors may affirm the appointment of the trustee or appoint another trustee; and (c) the trustee shall file a report with the official receiver who shall issue a certificate of assignment in bankruptcy.

Subsection (5) confirms the validity of actions taken under the consumer proposal before the date of the deemed annulment. The changes made to this subsection are minor technical matters, such as, the numbering and modernizing the language.

Subsection (6) allows for the possibility of reviving a consumer proposal that has been deemed annulled if the proposal was made by a person other than a bankrupt. The discretion on whether to revive a proposal lies with the administrator. Within 10 days after the day on which the consumer proposal is deemed to be annulled and if the administrator considers it appropriate, he or she may notify the creditors and the official receiver that the consumer proposal will be automatically revived 45 days after the day on which it was deemed to be annulled unless they file a notice of objection.

Subsection (7) confirms that if the administrator sends the notice under subsection (6) and no objection is filed within the 45-day period, the consumer proposal is automatically revived on the expiry of the 45 days.

Subsection (8) sets out the notice requirements if an objection to the revival is filed with the administrator during this 45-day period. In these cases, the administrator must notify the official receiver and each creditor that the consumer proposal is not going to be automatically revived at the expiry of the 45-day period.

Subsection (9) enables the administrator at any time in this process to apply to court, with notice to the official receiver and the creditors, for an order reviving the deemed annulment of a consumer proposal made by a person other than a bankrupt. This subsection also enables the court, if it considers it appropriate, to make an order reviving the consumer proposal on any terms that it considers appropriate.

Subsection (10) sets out the duties of the administrator after a consumer proposal is revived. The administrator shall file a report in relation to the revival with the official receiver and send a notice to the creditors informing them of the revival.

Subsection (11) confirms the validity of things done by a creditor in the exercise of the creditor's rights between the day on which the consumer proposal is deemed to be annulled and the day on which it is revived.

Present Law

66.31. (1) Independently of section 66.3,

• (a) where payments under a consumer proposal are to be made monthly or more frequently and the consumer debtor is in default to the extent of three months payments, or
• (b) where payments under a consumer proposal are to be made less frequently than monthly and the consumer debtor is in default for more than three months on any payment,

the consumer proposal shall thereupon be deemed to be annulled unless the court has previously ordered otherwise or unless an amendment to the consumer proposal has previously been filed, and the administrator shall forthwith so inform the creditors and file a report thereof in the prescribed form with the official receiver.

(2) Where an amendment to a consumer proposal filed before the deemed annulment of the consumer proposal by virtue of subsection (1) is withdrawn or refused by the creditors or the court, the consumer proposal shall thereupon be deemed to be annulled.

(3) A deemed annulment of a consumer proposal by virtue of subsection (1) or (2) does not prejudice the validity of any sale, disposition of property or payment duly made, or anything duly done under or in pursuance of the consumer proposal, and notwithstanding the deemed annulment of the consumer proposal, a guarantee given pursuant to the consumer proposal remains in full force and effect in accordance with its terms.

Senate Recommendation

None.

BIA: Consumer Proposals

Clause by Clause Briefing Book

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

• Bill Clause No. 53 - BIA Section 66.32(2)
• Bill Clause No. 54 - BIA Section 66.33
• Bill Clause No. 55 - BIA Section 66.34(1)
• Bill Clause No. 56 - BIA Section 66.37 and s.66.38

Bill Clause No. 53
Section No. 66.32(2)
Topic: Annulment of the proposal

Proposed Wording

66.32. (2) En cas d'annulation - effective ou présumée - de la proposition, les droits des créanciers sont rétablis jusqu'à concurrence du montant de leurs réclamations, déduction faite toutefois des dividendes reçus.

Rationale

The French version of subsection (2) was modernized.

Present Law

66.32. (2) En cas d'annulation -- effective ou présumée -- de la proposition, les droits des créanciers renaissent jusqu'à concurrence du montant de leurs réclamations, déduction faite toutefois des dividendes reçus.

Senate Recommendation

None.

Bill Clause No. 54
Section No. 66.33
Topic: Consumer Proposals

Proposed Wording

54. Section 66.33 of the Act is repealed.

Rationale

This section is illogical since the 1997 amendments to the BIA given the elimination of retroactivity in the date of bankruptcy.

Present Law

66.33 Where a consumer debtor in respect of whom a consumer proposal has been filed makes an assignment at any time before the court has approved or deemed to have approved the consumer proposal, the date of the assignment shall be deemed to be the earlier of

• (a) the day on which the consumer proposal was filed, and
• (b) the day on which the first petition, if any, for a receiving order in respect of that consumer debtor was filed.

Senate Recommendation

None.

Bill Clause No. 55
Section No. 66.34(1)
Topic: Ipso facto clauses

Proposed Wording

66.34. (1) If a consumer proposal has been filed in respect of a consumer debtor, no person may terminate or amend any agreement, including a security agreement, with the consumer debtor, or claim an accelerated payment, or the forfeiture of the term, under any agreement, including a security agreement, with the consumer debtor, by reason only that

Rationale

Subsection (1) was clarified to make it clear that the reference to "agreements" includes security agreements.

Present Law

66.34. (1) If a consumer proposal has been filed in respect of a consumer debtor, no person may terminate or amend any agreement with the consumer debtor, no person may terminate or amend any agreement with the consumer debtor, or claim an accelerated payment, or a forfeiture of the term, under any agreement with the consumer debtor, by reason only that

Senate Recommendation

The Bankruptcy and Insolvency Act be amended to provide that ipso facto clauses in agreements for basic services are not enforceable with respect to consumer proposals and consumer bankruptcies.

Bill Clause No. 56
Section No. 66.37 and s.66.38
Topic: Mandatory Counselling in a Consumer Proposal

Proposed Wording

66.37 If an administrator files an amendment to a consumer proposal before the withdrawal, refusal, approval or deemed approval by the court of the consumer proposal, or after the approval or deemed approval by the court of the consumer proposal and before it has been fully performed or annulled or deemed annulled, the provisions of this Division apply to the consumer proposal and the amended consumer proposal, with any modifications that the circumstances require, and, for that purpose, the definition "consumer debtor" in section 66.11 is to be read as follows:

"consumer debtor" means an individual who is insolvent;

66.38 (1) If a consumer proposal is fully performed, the administrator shall issue a certificate to that effect, in the prescribed form, to the consumer debtor and to the official receiver.

(2) Subsection (1) does not apply in respect of a consumer debtor who has refused or neglected to receive counselling provided under paragraph 66.13(2)(b).

Rationale

Financial counselling has been effective in helping debtors to manage better their financial affairs, change behaviour, and develop good financial management skills. This mandatory counselling may play an important role in helping debtors to avoid future financial difficulties.

Both section 66.37 and subsection 66.38 (1) have been amended to modernize the language.

While paragraph 66.13(2)(b) requires trustees to provide counselling to debtors, subsection 66.38 (2) provides that debtors making a consumer proposal are required to undergo counselling and that the administrator shall not issue a certificate of full performance of the consumer proposal if the debtor does not undergo this counselling.

Present Law

66.37 (1) Where an administrator files an amendment to a consumer proposal

• (a) before the withdrawal, refusal, approval or deemed approval by the court of the consumer proposal, or
• (b) after the approval or deemed approval by the court of the consumer proposal and before it has been fully performed or annulled or deemed annulled,

the administrator shall call a meeting of creditors to be held within twenty-one days after the amendment is filed, to consider the consumer proposal as amended.

(2) With respect to an amendment to a consumer proposal and the amended consumer proposal,

• (a) the provisions of this Division, except subsections 66.15(1) and (2), apply, with such modifications as the circumstances require; and
• (b) the definition "consumer debtor" in section 66.11 shall be read as follows: ""consumer debtor" means an insolvent natural person;".

66.38 Where a consumer proposal is fully performed, the administrator shall give a certificate to that effect, in the prescribed form, to the consumer debtor and to the official receiver.

Senate Recommendation

The proposed reform follows the Senate Committee's recommendation.

BIA: Consumer Bankruptcy

Clause by Clause Briefing Book

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

• Bill Clause No. 57 - BIA Section 67(1)
• Bill Clause No. 58 - BIA Section 68

Bill Clause No. 57
Section No. 67(1)
Topic: RRSP Exemption

Proposed Wording

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

• (b) any property, other than property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act, or in any prescribed plan, that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides, (b.1) goods and services tax credit payments that are made in prescribed circumstances to the bankrupt and that are not property referred to in paragraph (a) or (b), (b.2) prescribed payments relating to the essential needs of an individual that are made in prescribed circumstances to the bankrupt and that are not property referred to in paragraph (a) or (b), (b.3) subject to any prescribed conditions and limitations, property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act, other than property contributed to any such plan or fund in the 12 months, or in any longer period that the court may specify, before the date of bankruptcy,
• (c) all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before his or her discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year - or the fiscal year of the bankrupt if it is different from the calendar year - in which the bankrupt became a bankrupt, except the portion of any such refund that is not subject to the operation of this Act, and

Rationale

Registered retirement savings plans play an important role in the financial planning of many Canadians. For self-employed Canadians and those whose employers do not offer retirement savings benefits, an RRSP may be the best post-retirement source of funds available, other than the social safety net provided by the Government. Therefore, the protection of RRSP's is vital to ensure that Canadians are able to enjoy a reasonable living standard in their post-employment years.

Where an individual is forced into bankruptcy it is generally accepted that creditors should be entitled to recoup their losses against that individual's property, however, it is also generally accepted that certain essential property should be exempt from seizure. For example, in most jurisdictions, the bankrupt is entitled to keep household furnishings, clothing, tools of his or her trade, a vehicle (up to a set dollar value), and in some jurisdictions, their principal residence (also up to a set dollar value). RRSP's can be considered in the same domain as tools of the trade or a principal residence because it is essential to the well-being of the bankrupt in the long term. An RRSP is intended to provide for the individual with a reasonable living standard after their work years are done.

Further, the treatment of RRSP's and similar products differs depending on the province in which the bankrupt resides. Some provinces currently exempt RRSP's from seizure under a bankruptcy while others do not. In addition, RRSP-like products sold by the insurance industry are generally granted an exemption from seizure during a bankruptcy due to the nature of those products. Therefore, one bankrupt may be treated differently than another based on financial advice received years prior to a bankruptcy.

Therefore, the intention of the reform is to protect RRSP's and similar products from seizure during a bankruptcy so that the individual will have the financial means to care for him or herself without ending up as a burden on society and to ensure that bankrupts receive equal treatment regardless of the province of residence.

The reform will include anti-abuse mechanisms. First, the amount that may be exempted under the RRSP will be capped. The cap limit will allow for a reasonable rate of return on investment while ensuring that creditors are not denied repayment when the bankrupt holds an unduly large RRSP. Second, the exempted property will be required to be locked in until the bankrupt rolls the product into a retirement income fund, annuity or similar product. This will prevent a bankrupt from using the exemption to frustrate creditors and then breaking the RRSP for the bankrupt's personal use as soon as a discharge is granted. Third, the exempted property will be subject to a claw-back on any contributions made in the twelve months prior to the bankruptcy filing. The intention is to ensure that a bankrupt does not engage in strategic behaviour to deny creditors.

Present Law

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

• (b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides, or
  (b.1) such goods and services tax credit payments and prescribed payments relating to the essential needs of an individual as are made in prescribed circumstances and are not property referred to in paragraph (a) or (b), but it shall comprise
• (c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

Senate Recommendation

The reform follows Senate recommendation #2.

Bill Clause No. 58
Section No. 68
Topic: Surplus Income

Proposed Wording

68. (1) The Superintendent shall, by directive, establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the surplus income of an individual bankrupt and the amount that a bankrupt who has surplus income is required to pay to the estate of the bankrupt.

(2) The following definitions apply in this section.

"surplus income" means the portion of the total income of an individual bankrupt that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living, having regard to the applicable standards established under subsection (1).

"total income", for the purposes of the definition "surplus income",

• (a) includes, despite paragraphs 67(1)(b) and (b.1), all of a bankrupt's revenues from whatever nature or source that are received by the bankrupt between the date of the bankruptcy and the date of the bankrupt's discharge, including any amounts received as damages for wrongful dismissal, as a pay equity settlement or under any Act of Parliament or Act of the legislature of a province that relates to workers' or workmen's compensation; but
• (b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt's discharge, as a gift, a legacy or an inheritance or as any other windfall.

(3) The trustee shall, having regard to the applicable standards and to the personal and family situation of the bankrupt, determine whether the bankrupt has surplus income. The determination must also be made

• (a) whenever the trustee becomes aware of a material change in the bankrupt's financial situation; and
• (b) whenever the trustee is required to prepare a report referred to in subsection 170(1).

(4) Whenever the trustee is required to determine whether the bankrupt has surplus income, the trustee shall

• (a) if the trustee determines that there is surplus income,
  • (i) fix, having regard to the applicable standards, the amount that the bankrupt is required to pay to the estate of the bankrupt,
  • (ii) inform, in the prescribed manner, the official receiver, and every creditor who has requested such information, of the amount fixed under subparagraph (i), and
  • (iii) take reasonable measures to ensure that the bankrupt complies with the requirement to pay; and
• (b) if the trustee determines that there is no surplus income, inform, in the prescribed manner, the official receiver, and every creditor who has requested such information, of that determination.

(5) If the official receiver determines that the amount required to be paid by the bankrupt is substantially not in accordance with the applicable standards, the official receiver shall recommend to the trustee and to the bankrupt an amount required to be paid that the official receiver determines is in accordance with the applicable standards.

(5.1) On receipt of the official receiver's recommendation, the trustee may fix, having regard to the applicable standards, another amount as the amount that the bankrupt is required to pay to the estate of the bankrupt, and if the trustee does so, the trustee shall

• (a) inform the official receiver and every creditor, in the prescribed manner, of the amount fixed under this subsection; and
• (b) take reasonable measures to ensure that the bankrupt complies with the requirement to pay.

(6) If the trustee and the bankrupt are not in agreement with the amount that the bankrupt is required to pay under subsection (4) or (5.1), the trustee shall, without delay, in the prescribed form, send to the official receiver a request that the matter be determined by mediation and send a copy of the request to the bankrupt.

(7) On a creditor's request made within 30 days after the trustee has informed the creditor of the amount fixed under subsection (4) or (5.1), the trustee shall, within five days after the 30-day period, send to the official receiver a request, in the prescribed form, that the matter of the amount that the bankrupt is required to pay be determined by mediation and send a copy of the request to the bankrupt and the creditor.

(10) The trustee may, in any of the following circumstances - and shall apply if requested to do so by the official receiver in the circumstances referred to in paragraph (a) - apply to the court to fix, by order, in accordance with the applicable standards, and having regard to the personal and family situation of the bankrupt, the amount that the bankrupt is required to pay to the estate of the bankrupt:

• (a) if the trustee has not implemented a recommendation made by the official receiver under subsection (5);
• (b) if the matter submitted to mediation has not been resolved by the mediation; or
• (c) if the bankrupt has failed to comply with the requirement to pay as determined under this section.

(12) On the application of any interested person, the court may, at any time, amend an order made under this section to take into account material changes that have occurred in the financial situation of the bankrupt.

(14) For the purpose of this section, a requirement that a bankrupt pay an amount to the estate of the bankrupt is enforceable against all the bankrupt's property, including property referred to in paragraphs 67(1)(b) and (b.1).

(15) If an opposition to the automatic discharge of an individual bankrupt who is required to pay an amount to the estate of the bankrupt is filed, the bankrupt's obligation under this section ceases on the day on which the bankrupt would have been automatically discharged had the opposition not been filed, but nothing in this subsection precludes the court from determining that the bankrupt is required to pay an amount that the court considers appropriate to the estate of the bankrupt.

Rationale

Approximately 20-25% of bankrupts have sufficient income to pay a portion of it to their creditors. The proposed reform is aimed at ensuring that those bankrupts with the financial means to contribute to their estates pay as much as possible in order to maximize the return to their creditors. This section is updated to clarify ambiguities surrounding the concept of what constitutes income and surplus income. Specifically, it provides definitions as to what types of lump sum payments are and are not to be included in the calculation of income. In addition, this section sets out trustees' duties with regard to determining surplus income.

Subsection (1) introduces the commonly used term of "surplus income."

Subsection (2) provides the definition of "surplus income" and clarifies the definition of "total income." "Total income" explicitly includes revenue received as damages for wrongful dismissal, pay equity settlement, and any payment relating to workers' compensation. It explicitly excludes amounts received by the bankrupt, between the date of the bankruptcy and the date of the bankrupt's discharge, as a gift, legacy or inheritance or as any other windfall.

Subsection (3) puts the onus on the trustee to determine whether the bankrupt has surplus income. It also stipulates that the trustee must re-examine whether the bankrupt has surplus income whenever the trustee becomes aware of a material change in the bankrupt's circumstances and whenever the trustee is required to prepare a report under subsection 170 (1).

Subsection (4) sets out the duties of the trustee regarding the determination of surplus income. If the trustee determines that the bankrupt has surplus income, the trustee is to fix the amount payable to the bankrupt's estate, inform the official receiver and every creditor who has requested this information, and take reasonable measures to ensure that the bankrupt complies with the requirement to pay. However, if the trustee determines that the bankrupt has no surplus income, the trustee still must provide this information to the official receiver and every creditor who has requested it.

Subsections (5), (6), (7), and (10) are changed to modernize the language.

Subsection (5.1) provides that if the official receiver determines the bankrupt is able to pay a different amount than that fixed by the trustee, the official receiver may recommend this new amount to the trustee. At this point, the trustee may fix another amount and inform the official receiver and every creditor and take reasonable measures to ensure that the bankrupt complies with the requirement to pay.

Subsection (12) is changed to specify that the court may amend an order under this section to take into account material changes in the bankrupt's "financial" situation as opposed to the bankrupt's "personal or family" situation.

Subsection (14) provides that where a bankrupt is obligated to make surplus income payments, these payments may be enforced against otherwise exempt property, such as income from a pension.

Subsection (15) specifies when the bankrupt's obligation to pay surplus income ceases even if an opposition to the automatic discharge is filed, i.e., the obligation ceases the day on which the bankrupt would have been automatically discharged. However, this does not preclude the court from determining that the bankrupt is required to pay an amount that the court considers appropriate to the bankrupt's estate.

Present Law

68. (1) The Superintendent shall, by directive, establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the portion of the total income of an individual bankrupt that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living.

(2) For the purposes of this section,

• (a) "total income" referred to in subsection (1) includes, notwithstanding paragraphs 67(1)(b) and
• (b.1), all revenues of a bankrupt of whatever nature or source; and
• (b) a requirement that a bankrupt pay an amount to the estate of the bankrupt is enforceable against all property of the bankrupt, other than property referred to in paragraphs 67(1)(b) and (b.1).

(3) The trustee shall

• (a) having regard to the applicable standards established under subsection (1), and to the personal and family situation of the bankrupt, fix the amount that the bankrupt is required to pay to the estate of the bankrupt;
• (b) inform the official receiver in writing of the amount fixed under paragraph (a); and
• (c) take reasonable measures to ensure that the bankrupt complies with the requirement to pay.

(4) The trustee may, at any time, amend an amount fixed under subsection (3) to take into account

• (a) material changes that have occurred in the personal or family situation of the bankrupt; or
• (b) a recommendation made by the official receiver under subsection (5).

(5) Where the official receiver determines that the amount required to be paid by the bankrupt under subsection (3) or (4) is substantially not in accordance with the applicable standards established under subsection (1), the official receiver shall recommend to the trustee and to the bankrupt an amount required to be paid that the official receiver determines is in accordance with the applicable standards.

(6) Where the trustee and the bankrupt are not in agreement with the amount that the bankrupt is required to pay under subsection (3) or (4), the trustee shall, forthwith, in the prescribed form, send to the official receiver a request that the matter be determined by mediation and send a copy of the request to the bankrupt.

(7) On the request in writing of a creditor made within thirty days after the date of bankruptcy or an amendment referred to in subsection (4), the trustee shall, within the five days following the thirty day period, send to the official receiver a request in the prescribed form that the matter of the amount the bankrupt is required to pay under subsection (3) or (4) be determined by mediation and send a copy of the request to the bankrupt and the creditor.

(8) A mediation shall be in accordance with prescribed procedures.

(9) Documents contained in a file on the mediation of a matter under this section form part of the records referred to in subsection 11.1(2).

(10) Where

• (a) the trustee has not implemented a recommendation made by the official receiver under subsection (5),
• (b) the issue submitted to mediation requested under subsection (6) or (7) is not thereby resolved, or
• (c) the bankrupt fails to comply with the requirement to pay as determined under this section,

the trustee may, or on the request of the inspectors, any of the creditors or the official receiver shall, apply to the court for the hearing of the matter, and the court may, on the hearing, in accordance with the standards established under subsection (1) and having regard to the personal and family situation of the bankrupt, by order, fix the amount that the bankrupt is required to pay to the estate of the bankrupt.

(11) The court may fix an amount that is fair and reasonable

• (a) as salary, wages or other remuneration for the services being performed by a bankrupt for a person employing the bankrupt, or
• (b) as payment for or commission in respect of any services being performed by a bankrupt for a person,

where the person is related to the bankrupt, and the court may, by order, determine the part of the salary, wages or other remuneration, or the part of the payment or commission, that shall be paid to the trustee on the basis of the amount so fixed by the court, unless it appears to the court that the services have been performed for the benefit of the bankrupt and are not of any substantial benefit to the person for whom they were performed.

(12) On the application of any interested person, the court may, at any time, amend an order made under this section to take into account material changes that have occurred in the personal or family situation of the bankrupt.

(13) An order of the court made under this section may be served on a person from whom the bankrupt is entitled to receive money and, in such case,

• (a) the order binds the person to pay to the estate of the bankrupt the amount fixed by the order; and
• (b) if the person fails to comply with the terms of the order, the court may, on the application of the trustee, order the person to pay the trustee the amount of money that the estate of the bankrupt would have received had the person complied with the terms of the order.

(14) For the purposes of section 38, an application referred to in subsection (10) is deemed to be a proceeding for the benefit of the estate.

Senate Recommendation

The proposed reform follows the Senate Committee's recommendation.

BIA: Technical changes

Clause by Clause Briefing Book

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

• Bill Clause No. 59 - BIA Section 68.1(2)
• Bill Clause No. 60 - BIA Section 69(2)(d) and (d)(i)
• Bill Clause No. 61 - BIA Section 69.1(2)(d) and (d)(i)
• Bill Clause No. 62 - BIA Section 69.3 (1), (2) and (3)
• Bill Clause No. 63 - BIA Section 70(2)
• Bill Clause No. 64 - BIA Section 74(3)
• Bill Clause No. 65 - BIA Section 81(2) and (4)

Bill Clause No. 59
Section No. 68.1(2)
Topic: Assignment of book debts

Proposed Wording

68.1 (2) An assignment of existing or future amounts receivable as payment for or commission or professional fees in respect of services rendered by a debtor who is an individual before the debtor became bankrupt is of no effect in respect of such amounts earned or generated after the bankruptcy.

Rationale

Subsection (2) was modernized.

Present Law

68.1 (2) An assignment of existing or future amounts receivable as payment for or commission or professional fees in respect of services rendered made by a debtor who is a natural person before the debtor became bankrupt is of no effect in respect of such amounts earned or generated after the bankruptcy.

Senate Recommendation

None.

Bill Clause No. 60
Section No. 69(2)(d) and (d)(i)
Topic: Aircraft Objects

Proposed Wording

69. (2)(d) to prevent a creditor who holds security on aircraft objects under an agreement with the insolvent person from taking possession of the aircraft objects

• (i) if, after the commencement of proceedings under this Act, the insolvent person defaults in protecting or maintaining the aircraft objects in accordance with the agreement,

Rationale

Section 69(1) stays any proceedings a creditor may have against a debtor who has filed a notice of intention to file a proposal.

Due to commitments made under the Act to implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Act), it became necessary to create an exception so that creditors with security on aircraft objects are not subject to the stay of proceedings under the BIA if the debtor fails to protect or maintain the object in accordance with the agreement. The Act also provides that 60 days following the filing of the notice of intention, the creditor can seize the object unless the debtor has remedied all defaults under the agreement. Finally, it releases the stay if after the 60-day period the debtor goes into default.

Paragraph 69(2)(d) and subparagraph (d)(i) simply change the word "equipment" to "aircraft objects", which will be a defined term in the BIA once the Act comes into force. These provisions also make clear that the exceptions only apply to secured creditors as defined in the BIA. Similar provisions are included in subsection 65.1(4) of the BIA to specifically deal with leases.

Present Law

Present wording will come into force when the insolvency provisions of the Act come into force.

69. (2)(d) to prevent a creditor who holds security on aircraft objects - or who is a lessor of aircraft objects or a conditional seller of aircraft objects - under an agreement with the insolvent person from taking possession of the equipment

• (i) if, after the commencement of proceedings under this Act, the insolvent person defaults in protecting or maintaining the equipment in accordance with the agreement,

Senate Recommendation

None.

Bill Clause No. 61
Section No. 69.1(2)(d) and (d)(i)
Topic: Aircraft Objects

Proposed Wording

69.1 (2)(d) to prevent a creditor who holds security on aircraft objects under an agreement with the insolvent person from taking possession of the aircraft objects

• (i) if, after the commencement of proceedings under this Act, the insolvent person defaults in protecting or maintaining the aircraft objects in accordance with the agreement,

Rationale

Section 69.1(1) stays any proceedings a creditor may have against a debtor who has filed a proposal.

Due to commitments made under the Act to implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Act), it became necessary to create an exception so that creditors with security on aircraft objects are not subject to the stay of proceedings under the BIA if the debtor fails to protect or maintain the object in accordance with the agreement. The Act also provides that 60 days following the filing of the proposal, the creditor can seize the object unless the debtor has remedied all defaults under the agreement. Finally, it releases the stay if after the 60-day period the debtor goes into default.

Paragraph 69.1(2)(d) and subparagraph (d)(i) simply change the word "equipment" to "aircraft objects", which will be a defined term in the BIA once the Act comes into force. These provisions also make clear that the exceptions only apply to secured creditors as defined in the BIA. Similar provisions are included in subsection 65.1(4) of the BIA to specifically deal with leases.

Present Law

Present wording will come into force when the insolvency provisions of the Act come into force.

69.1 (2)(d) to prevent a creditor who holds security on aircraft objects or who is a lessor of aircraft objects or a conditional seller of aircraft objects under an agreement with the insolvent person from taking possession of the equipment

• (i) if, after the commencement of proceedings under this Act, the insolvent person defaults in protecting or maintaining the equipment in accordance with the agreement,

Senate Recommendation

None.

Bill Clause No. 62
Section No. 69.3 (1), (2) and (3)
Topic: Stay of Proceedings

Proposed Wording

69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

(1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged.

(2) Subject to subsection (3), sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the court shall not postpone the right of the secured creditor to realize or otherwise deal with his or her security, except as follows:

(3) If a secured creditor who holds security on aircraft objects under an agreement with the bankrupt is postponed from realizing or otherwise dealing with that security, the order under which the postponement is made is terminated

• (a) if, after the order is made, the trustee defaults in protecting or maintaining the aircraft objects in accordance with the agreement;
• (b) 60 days after the day on which the order is made unless, during that period, the trustee
• (i) remedied the default of every other obligation under the agreement, other than a default constituted by the commencement of proceedings under this Act or the breach of a provision in the agreement relating to the bankrupt's financial condition, and
• (ii) agreed to perform the obligations under the agreement, other than the bankrupt's obligation not to become insolvent or an obligation relating to the bankrupt's financial condition, until the day on which the secured creditor is able to realize or otherwise deal with his or her security; or
• (c) if, during the period that begins 60 days after the day on which the order is made and ends on the day on which the secured creditor is able to realize or otherwise deal with his or her security, the trustee defaults in performing an obligation under the agreement, other than the bankrupt's obligation not to become insolvent or an obligation relating to the bankrupt's financial condition.

Rationale

Subsections (1) and (2) were modernized.

The addition of subsection (1.1) clarifies that a creditor may realize against the property of the bankrupt without leave of the court once the trustee has been discharged. This change was necessary as creditors could not realize claims, without court approval, after the trustee was discharged, since a debtor who has not been discharged would still be protected from creditor claims under stay of proceedings provisions of the BIA.

With regards to the Act to implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment) (the Act), subsection (2) refers to an exception (in subsection (3)) to the rules regarding stays in bankruptcies for creditors who have security on aircraft objects.

Subsection (3) clarifies the language in the Act so that the provision clearly applies to bankruptcies, where there must be an order postponing the secured creditor's right to realize on his assets.

Present Law

69.3 (1) Subject to subsection (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged.

(2) Subject to sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with his security in the same manner as he would have been entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the court shall not postpone the right of the secured creditor to realize or otherwise deal with his security, except as follows:

The present wording of subsection (3) will come into force when the insolvency provisions of the Act come into force.

(3) The bankruptcy of a debtor does not prevent a creditor who holds security on aircraft objects or who is a lessor of aircraft objects or a conditional seller of aircraft objects under an agreement with the bankrupt from taking possession of the equipment

• (a) if, after the commencement of proceedings under this Act, the trustee defaults in protecting or maintaining the equipment in accordance with the agreement;
• (b) sixty days after the commencement of proceedings under this Act unless, during that period, the trustee
• (i) remedied the default of every other obligation under the agreement, other than a default constituted by the commencement of proceedings under this Act or the breach of a provision in the agreement relating to the bankrupt's financial condition,
• (ii) agreed to perform the obligations under the agreement, other than an obligation not to become insolvent or an obligation relating to the bankrupt's financial condition, until the day on which proceedings under this Act end, and
• (iii) agreed to perform all the obligations arising under the agreement after the proceedings under this Act end; or
• (c) if, during the period that begins on the expiry of the sixty-day period and ends on the day on which proceedings under this Act end, the trustee defaults in performing an obligation under the agreement, other than an obligation not to become insolvent or an obligation relating to the bankrupt's financial condition.

Senate Recommendation

None.

Bill Clause No. 63
Section No. 70(2)
Topic: Costs

Proposed Wording

70. (2) Despite subsection (1), one bill of costs of a barrister or solicitor or, in the Province of Quebec, an advocate, including the executing officer's fees and land registration fees, shall be payable to the creditor who has first attached by way of garnishment or filed with the executing officer an attachment, execution or other process against the property of the bankrupt.

Rationale

The English version of subsection (2) was amended to comply with the Federal government's Harmonization Program aimed at changes to federal legislation to reflect the appropriate civil and common law terminology.

Present Law

70. (2) Despite subsection (1), one bill of costs of a barrister or solicitor or, in the Province of Quebec, an advocate, including the executing officer's fees and land registration fees, shall be payable to the creditor who has first attached by way of garnishment or lodged with the executing officer an attachment, execution or other process against the property of the bankrupt.

Senate Recommendation

None.

Bill Clause No. 64
Section No. 74(3)
Topic: Caveat

Proposed Wording

74. (3) If a bankrupt owns any real property or immovable or holds any charge registered in a land registry office or has or is believed to have any interest, estate or right in any of them, and for any reason a copy of the bankruptcy order or assignment has not been registered as provided in subsection (1), a caveat or caution may be filed with the official in charge of the land registry by the trustee, and any registration made after the filing of the caveat or caution in respect of the real property, immovable or charge is subject to the caveat or caution unless it has been removed or cancelled under the provisions of the Act under which the real property, immovable, charge, interest, estate or right is registered.

Rationale

The English version of subsection (3) was amended to comply with the Federal government's Harmonization Program aimed at changes to federal legislation to reflect the appropriate civil and common law terminology.

Present Law

74. (3) If a bankrupt owns any real property of immovable or holds any charge registered in a land registry office or is believed to have any interest, estate or right in any of them, and for any reason a copy of the bankruptcy order or assignment has not been registered as provided in subsection (1), a caveat or caution may be lodged with the official in charge of the land registry by the trustee, and any registration made after the lodging of the caveat or caution in respect of the real property, immovable or charge is subject to the caveat or caution unless it has been removed or cancelled under the provisions of the Act under which the real property, immovable, charge, interest, estate or right is registered.

Senate Recommendation

None.

Bill Clause No. 65
Section No. 81(2) and (4)
Topic: Disposal of claims

Proposed Wording

81. (2) The trustee with whom a proof of claim is filed under subsection (1) shall within 15 days after the filing of the claim or within 15 days after the first meeting of creditors, whichever is the later, either admit the claim and deliver possession of the property to the claimant or send notice in the prescribed manner to the claimant that the claim is disputed, with the trustee's reasons for disputing it, and, unless the claimant appeals the trustee' decision to the court within 15 days after the sending of the notice of dispute, the claimant is deemed to have abandoned or relinquished all his or her right to or interest in the property to the trustee who may then sell or dispose of the property free of any right, title or interest of the claimant.

(4) The trustee may send notice in the prescribed manner to any person to prove his or her claim to or in property under this section, and, unless that person files with the trustee a proof of claim, in the prescribed form, within 15 days after the sending of the notice, the trustee may then, with the leave of the court, sell or dispose of the property free of any right, title or interest of that person.

Rationale

The amendments to subsections (2) and (4) are technical in nature and modernize the language and the methods, which will be described in the regulations, by which notices can be sent.

Present Law

81. (2) The trustee with whom a proof of claim is filed under subsection (1) shall within fifteen days thereafter or within fifteen days after the first meeting of creditors, whichever is the later, either admit the claim and deliver possession of the property to the claimant or give notice in writing to the claimant that the claim is disputed with his reasons therefor, and, unless the claimant appeals therefrom to the court within fifteen days after the mailing of the notice of dispute, he shall be deemed to have abandoned or relinquished all his right to or interest in the property to the trustee who thereupon may sell or dispose of the property free of any lien, right, title or interest of the claimant.

(4) The trustee may give notice in writing to any person to prove his claim to or in property under this section, and, unless that person files with the trustee a proof of claim in the prescribed form within fifteen days after the mailing of the notice, the trustee may thereupon with the leave of the court sell or dispose of the property free of any lien, right, title or interest of that person.

Senate Recommendation

None.

BIA: Unpaid suppliers

Clause by Clause Briefing Book

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

• Bill Clause No. 66 - BIA Section 81.1

Bill Clause No. 66
Section No. 81.1
Topic: Unpaid Suppliers

Proposed Wording

81.1 (1) Subject to this section, if a person (in this section referred to as the "supplier") has sold to another person (in this section referred to as the "purchaser") goods for use in relation to the purchaser's business and delivered the goods to the purchaser or to the purchaser's agent or mandatary, and the purchaser has not fully paid for the goods, the supplier may have access to and repossess the goods at the supplier's own expense, and the purchaser, trustee or receiver, or the purchaser's agent or mandatary, as the case may be, shall release the goods, if

• (a) the supplier presents a written demand for repossession to the purchaser, trustee or receiver, in the prescribed form and containing the details of the transaction, within a period of 15 days after the day on which the purchaser became bankrupt or became a person who is subject to a receivership;
• (b) the goods were delivered within 30 days before the day on which the purchaser became bankrupt or became a person who is subject to a receivership;

(4) If a notice of intention under section 50.4 or a proposal was filed in respect of the purchaser after the delivery of the goods to the purchaser and before the purchaser became bankrupt or became a person who is subject to a receivership, the 30-day period referred to in paragraph (1)(b) is the 30-day period before the filing of the notice of intention or, if there was no notice of intention, the filing of the proposal.

(5) A supplier's right to repossess goods under this section expires if not exercised within the 15-day period referred to in paragraph (1)(a), unless the period is extended before its expiry by the trustee or receiver, or by the court.

(12) The following definitions apply in this section.

• "person who is subject to a receivership" means a person in respect of whom any property is under the possession or control of a receiver. "receiver" means a receiver within the meaning of subsection 243(2).

Rationale

Trade suppliers are generally smaller and unsecured creditors in an insolvency proceeding. It is onerous for them to participate in the process on a cost/benefit analysis. Further, they are sometimes subject to abusive practice. Unethical managers who, aware that their business is careening towards insolvency, may be tempted to order excessive supplies just prior to a BIA filing with the intention of using the supplies to pay secured creditors. The trade suppliers had no recourse against such action until the addition of section 81.1.

Currently, the provision to protect unpaid suppliers creates a 30-day window for period from delivery to repossession of goods. For example, if 20 days after delivery of goods the purchaser commences proceedings under the BIA, the supplier has 10 days to repossess the goods that were not paid for. This causes some difficulty because the unpaid supplier may not have sufficient time to act. The reform is intended to create a standardized period for unpaid suppliers to act. Essentially, the reform will extend the window from 30 days to 45 days - an unpaid supplier may repossess goods delivered any time in the 30 days prior to a bankruptcy and has a period of 15 days after such filing to do so. The 15-day period should provide suppliers with a sufficient period to act to defend their interests.

Subsection (1) amends the current legislation in two respects. First, it provides for the situation where the debtor places the goods with an agent - for example, a warehouse. Courts have found that the current legislation does not account for this situation; therefore, the supplier has no recourse to repossess the goods. Second, the reform provides a supplier with the right to request repossession of goods within a set period of 15 days after the debtor becomes bankrupt or a receiver is appointed in respect of property of the debtor.

Subsection (4) is intended to provide application of the provision in the situation where a debtor initially proceeds by way of the proposal provisions of the BIA rather than bankruptcy or a receivership. Effectively, the 30-day period referred to in subsection (1) would be the 30 days prior to the commencement of proceedings under the BIA. The intention of the provision is to prevent against abuse by debtors who could initiate a proposal and, after 30 days, proceed to bankruptcy. Without the provision, unpaid suppliers would have no recourse to repossess their goods against debtors who proceed by way of a proposal or notice of intention.

Subsection (5) has been included to provide greater flexibility to extend beyond the 15-day period provided for in subsection (1). The trustee or receiver may extend the period unilaterally or an application may be made to the court by any interested party to extend the period in circumstances the court considers it appropriate to do so.

Subsection (12) has been added to provide definitions of terms used in the section.

Present Law

81.1 (1) Subject to this section, where a person (in this section referred to as the "supplier") has sold and delivered goods to another person (in this section referred to as the "purchaser") for use in relation to the purchaser's business, and the purchaser has not fully paid for the goods, the supplier may have access to and repossess the goods at the supplier's own expense, and the purchaser, trustee or receiver shall release the goods, if

• (a) the supplier presents a written demand for repossession to the purchaser, trustee or receiver, in prescribed form and containing the details of the transaction, within a period of thirty days after the delivery of the goods to the purchaser;
• (b) at the time when the demand referred to in paragraph (a) is presented,
  • (i) the purchaser is bankrupt, or
  • (ii) there is a receiver, within the meaning of subsection 243(2), in relation to the purchaser;
• (c) at the time when the demand referred to in paragraph (a) is presented, the goods
  • (i) are in the possession of the purchaser, trustee or receiver,
  • (ii) are identifiable as the goods delivered by the supplier and not fully paid for,
  • (iii) are in the same state as they were on delivery,
  • (iv) have not been resold at arms' length, and
  • (v) are not subject to any agreement for sale at arms' length; and
• (d) the purchaser, trustee or receiver does not, forthwith after the demand referred to in paragraph (a) is presented, pay to the supplier the entire balance owing.

(4) Where a notice of intention under section 50.4 or a proposal was filed in respect of the purchaser after the delivery of the goods to the purchaser and before there was a receiver, within the meaning of subsection 243(2), in relation to the purchaser or the purchaser became bankrupt, the period between

• (a) the earlier of the filing of the notice of intention or proposal, and
• (b) the earlier of the first day there was a receiver, within the meaning of subsection 243(2), in relation to the purchaser or the day the purchaser became bankrupt shall not be counted in determining the end of the thirty day period referred to in paragraph (1)(a).

(5) A supplier's right to repossess goods pursuant to this section expires if not exercised within ten days after the purchaser, trustee or receiver presents the supplier with a written notice admitting that right, unless the ten day period is extended by mutual agreement.

Senate Recommendation

Senate recommendation #23, which called for the repeal of the unpaid suppliers right to repossess goods, was not followed. The Senate's concern was that the legislation was not working as envisioned and, therefore, should be removed. For the reasons discussed in "Rationale", the removal of the provision was not considered the most effective approach.

BIA: Priority for unpaid wages and pension contributions

Clause by Clause Briefing Book

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

• Bill Clause No. 67 - BIA Section 81.3 and 81.4
• Bill Clause No. 67 - BIA Section 81.5 and 81.6

Bill Clause No. 67
Section No. 81.3 and 81.4
Topic: Unpaid Wages in Bankruptcy/Receivership

Proposed Wording

81.3 (1) The claim of a clerk, servant, travelling salesperson, labourer or worker who is owed wages, salaries, commissions or compensation by a bankrupt for services rendered during the six months immediately before the date of bankruptcy is secured, as of that date, to the extent of $2,000, by security on all the current assets of the bankrupt on that date.

(2) For the purposes of subsection (1), commissions payable when goods are shipped, delivered or paid for, if shipped, delivered or paid for within the six month period referred to in that subsection, are deemed to have been earned in those six months.

(3) The claim of a travelling salesperson who is owed money by a bankrupt for disbursements properly incurred in and about the bankrupt's business during the six months immediately before the date of bankruptcy is secured, as of that date, to the extent of $1,000, by security on all the bankrupt's current assets on that date.

(4) A security under this section ranks above every other claim, right, charge or security against the bankrupt's current assets, regardless of when that other claim, right, charge or security arose, except rights under sections 81.1 and 81.2 and amounts referred to in subsection 67(3) that have been deemed to be held in trust.

(5) If the trustee disposes of current assets covered by the security, the trustee is liable for the claim of the clerk, servant, travelling salesperson, labourer or worker to the extent of the amount realized on the disposition of the current assets, and is subrogated in and to all rights of the clerk, servant, traveling salesperson, labourer or worker of the amounts paid to that person by the trustee.

(6) For the purpose of this section and section 81.4, "compensation" includes vacation pay but does not include termination or severance pay.

(7) A claim referred to in this section is proved by delivering to the trustee a proof of claim in the prescribed form.

81.4 (1) The claim of a clerk, servant, travelling salesperson, labourer or worker who is owed wages, salaries, commissions or compensation by a person who is subject to a receivership for services rendered during the six months immediately before the first day on which there was a receiver in relation to the person is secured, as of that day, to the extent of $2,000, by security on all the person's current assets that are in the possession or under the control of the receiver.

(2) For the purposes of subsection (1), commissions payable when goods are shipped, delivered or paid for, if shipped, delivered or paid for within the six-month period referred to in that subsection, are deemed to have been earned in those six months.

(3) The claim of a travelling salesperson who is owed money by a person who is subject to a receivership for disbursements properly incurred in and about the person's business during the six months immediately before the first day on which there was a receiver in relation to the person is secured, as of that day, to the extent of $1,000, by security on all the person's current assets that are in the possession or under the control of the receiver.

(4) A security under this section ranks above every other claim, right, charge or security against the person's current assets, regardless of when that other claim, right, charge or security arose, except rights under sections 81.1 and 81.2.

(5) If the receiver takes possession or in any way disposes of current assets covered by the security, the receiver is liable for the claim of the clerk, servant, travelling salesperson, labourer or worker to the extent of the amount realized on the disposition of the current assets, and is subrogated in and to all rights of the clerk, servant, traveling salesperson, labourer or worker of the amounts paid to that person by the receiver.

(6) A claim referred to in this section is proved by delivering to the receiver a proof of claim in the prescribed form.

(7) The following definitions apply in this section.

• "person who is subject to a receivership" means a person in respect of whom any property is under the possession or control of a receiver. "receiver" means a receiver within the meaning of subsection 243(2).

Rationale

The reform is intended to create a limited super-priority in a bankruptcy or a receivership in favour of employees for unpaid wage claims. The super-priority is limited because the charge applies only to current assets - cash, accounts receivable and inventory.

The super-priority is created in situations where the debtor became bankrupt or became subject to a receivership to ensure comprehensive protection of unpaid wage claims. Without similar protection in either case, debtors with large unpaid wage claims would be encouraged to choose that proceeding which did not include the super-priority.

The discussion below references section 81.3 - the bankruptcy provision - but it mirrors section 81.4 - the receivership provision.

Subsection (1) sets out the basic application of the section. The language used mirrors the current provisions of the BIA, which have been interpreted and accepted by the courts.

Subsection (2) mirrors the current provisions of the BIA to capture commissions payable to salespersons.

Subsection (3) mirrors the current provisions of the BIA to capture disbursements made by employees and refundable to them by the debtor.

Subsection (4) creates the ranking of the charge created by the section. While the charge is granted a super-priority to almost all other creditors, it is subject to the rights of unpaid suppliers to repossess their goods, the rights of unpaid fishers, farmers and aquaculturists to a secured charge over the consideration received by the debtor for goods provided by the fisher, farmer or aquaculturist and deemed trusts.

Subsection (5) provides that a trustee who disposes of current assets is personally liable to unpaid employees in the amount of the consideration received for the current assets. The trustee is granted a right of subrogation to the claims of employees paid by the trustee pursuant to the section.

Subsection (6) defines "compensation" to exclude termination and severance pay. It is a codification of current practice.

Subsection (7) sets out the process for an employee to make a claim under the section.

Present Law

Section 136 of the BIA currently provides for a preferred priority for unpaid wage claims. There is no law that creates a super-priority.

Senate Recommendation

The reform follows Senate recommendation #20.

Bill Clause No. 67
Section No. 81.5 and 81.6
Topic: Unremitted Pension Contributions

Proposed Wording

81.5 (1) If the bankrupt is an employer who participated or participates in a prescribed pension plan for the benefit of the bankrupt's employees, the following amounts that are unpaid on the date of bankruptcy to the fund established for the purpose of the pension plan are secured by security on all the assets of the bankrupt:

• (a) an amount equal to the sum of all amounts that were deducted from the employees' remuneration for payment to the fund;
• (b) if the prescribed pension plan is regulated by an Act of Parliament,
  • (i) an amount equal to the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that was required to be paid by the employer to the fund, and
  • (ii) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985; and
• (c) in the case of any other prescribed pension plan,
  • (i) an amount equal to the amount that would be the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament, and
  • (ii) an amount equal to the sum of all amounts that would have been required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985, if the prescribed plan were regulated by an Act of Parliament.

(2) A security under this section ranks above every other claim, right, charge or security against the bankrupt's assets, regardless of when that other claim, right, charge or security arose, except

• (a) rights under sections 81.1 and 81.2;
• (b) amounts referred to in subsection 67(3) that have been deemed to be held in trust; and
• (c) securities under sections 81.3 and 81.4.

(3) If the trustee disposes of assets covered by the security, the trustee is liable for the amounts referred to in subsection (1) to the extent of the amount realized on the disposition of the assets, and is subrogated in and to all rights of the fund established for the purpose of the pension plan in respect of those amounts.

81.6 (1) If a person who is subject to a receivership is an employer who participated or participates in a prescribed pension plan for the benefit of the person's employees, the following amounts that are unpaid immediately before the first day on which there was a receiver in relation to the person are secured by security on all the person's assets:

• (a) an amount equal to the sum of all amounts that were deducted from the employees' remuneration for payment to the fund;
• (b) if the prescribed pension plan is regulated by an Act of Parliament,
  • (i) an amount equal to the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that was required to be paid by the employer to the fund, and
  • (ii) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985; and
• (c) in the case of any other prescribed pension plan,
  • (i) an amount equal to the amount that would be the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Regulations, 1985, that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament, and
  • (ii) an amount equal to the sum of all amounts that would have been required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985, if the prescribed plan were regulated by an Act of Parliament.

(2) A security under this section ranks above every other claim, right, charge or security against the person's assets, regardless of when that other claim, right, charge or security arose, except rights under sections 81.1 and 81.2 and securities under sections 81.3 and 81.4.

(3) If the receiver disposes of assets covered by the security, the receiver is liable for the amounts referred to in subsection (1) to the extent of the amount realized on the disposition of the assets, and is subrogated in and to all rights of the fund established for the purpose of the pension plan in respect of those amounts.

(4) The following definitions apply in this section.

• "person who is subject to a receivership" means a person in respect of whom any property is under the possession or control of a receiver.
• "receiver" means a receiver within the meaning of subsection 243(2).

Rationale

Pension rights may form a significant portion of a wage earner's compensation from its employer, although it is deferred income. When the employer undertakes a restructuring under the proposal provisions of the BIA, debts, including those owed to a pension fund, may be compromised. For wage earners, a diminution of pension benefits would have a negative impact on future income levels.

The intention of the reform, as set out in subsection (1), is to create a super-priority for claims related to unremitted pension contributions outstanding when a employer becomes bankrupt. The amounts subject to the section are (1) contributions deducted from employees' salaries but not remitted to the pension fund, (2) contributions owed by an employer for the cost of benefits offered under the pension plan, excluding amounts payable to reduce an unfunded pension liability, and (3) contributions owed by an employer to a defined contribution plan. Claims not included under the super-priority are claims related to special payments ordered by a pension regulator to liquidate an unfunded liability and claims related to unfunded liabilities directly.

The super-priority is created in situations where the debtor became bankrupt or became subject to a receivership to ensure comprehensive protection of unremitted pension obligations claims. Without similar protection in either case, debtors with large unremitted pension obligations would be encouraged to choose that proceeding which did not include the super-priority.

Subsection (2) provides that the charge ranks in priority to all other claims except the rights of unpaid suppliers to repossess goods, the rights of unpaid fishers, farmers and aquaculturists to a secured charge against inventory, deemed trusts and the rights of unpaid employees to receive a limited super-priority charge under the BIA. Unlike unpaid wage claims, however, the super-priority is not limited to specific assets but rather is a charge against all of the assets of the debtor.

Subsection (3) provides that a trustee who disposes of assets covered by the super-priority charge is personally liable to pension fund for the amount of the consideration received for the covered assets. The trustee is granted a right of subrogation to the claim of pension fund pursuant to the section in an amount equal to the amount paid by the receiver to the pension fund.

The nature of pension regulation in Canada also affects aspects of the section - pensions may be regulated federally or provincially. The section must capture kinds of pensions described in the federal and provincial legislation. Prescribing pension plans that will be subject to this section provides greater flexibility to ensure that the appropriate pension plans are captured.

Present Law

None.

Senate Recommendation

Senate recommendation #21 advised that priorities relating to pension obligations not be improved. For the reasons discussed in "Rationale", the Senate recommendation was not followed.

BIA: Treatment of contracts

Clause by Clause Briefing Book

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

• Bill Clause No. 68 - BIA Section 84.1
• Bill Clause No. 68 - BIA Section 84.2

Bill Clause No. 68
Section No. 84.1
Topic: Assignment of Agreements

Proposed Wording

84.1 (1) The court may, on application by an insolvent person or a trustee, make an order assigning the rights and obligations of the insolvent person under any agreement to any person, specified by the court, who has agreed to the assignment.

(2) The applicant must give notice of the assignment, in the prescribed manner, to every party to the agreement.

(3) Subsection (1) does not apply in respect of rights and obligations

• (a) under an eligible financial contract within the meaning of subsection 65.1(8);
• (b) under a lease referred to in subsection 65.2(1);
• (c) under a collective agreement; and
• (d) that are not assignable by reason of their nature.

(4) In deciding whether to make an assignment, the court must consider, among other things,

• (a) whether the person to whom the rights and obligations are to be assigned would be able to perform the obligations; and
• (b) whether it would be appropriate to assign the rights and obligations to that person.

(5) The court may not make the assignment if the court is satisfied that the insolvent person is in default under the agreement.

Rationale

The intention of the reform is to protect and enhance the assets of the estate of a bankrupt or an entity undergoing a restructuring by allowing that person to assign existing agreements to third parties for value.

Subsection (1) requires that court approval be obtained because there may be valid concerns that the party to whom the debtor wishes to assign the agreement may not be appropriate. The court can act as a disinterested third party to make a determination of the appropriateness of the proposed assignee based on the facts of the particular case.

A court hearing will only be required in circumstances where a counter-party refuses to agree to an assignment or an assignment to a particular third party. Subsection (2) is intended to ensure that the counter-parties to the agreement have an opportunity to present their interests to the court.

Subsection (3) excludes certain agreements from the application of the section. Paragraphs (a), (b) and (c) refer to agreements that have obtained special treatment under the BIA and assignment would be contrary to that treatment. Paragraph (d) provides the court with the opportunity to extend the exclusion provision to include agreements that it considers non-assignable due to the agreements nature. The last paragraph is intended to provide flexibility to the court to review each agreement in light of the circumstances to determine whether or not it would be appropriate to allow the assignment.

Subsection (4) provides the courts with legislative guidance as to when an agreement may be assigned. The guidance is limited to enable the court to exercise its discretion to address individual fact situations.

Subsection (5) provides balance between the interests of the debtor and counter-parties to an agreement that is to be assigned. It would be unfair that the estate benefit financially by an assignment at the same time that a counter party is required to take a loss. If the agreement is in financial default, the counter-party would only have a claim against the debtor in bankruptcy.

Present Law

None.

Senate Recommendation

The reform follows Senate recommendation #31.

Bill Clause No. 68
Section No. 84.2
Topic: Ipso Facto Clauses

Proposed Wording

84.2 (1) No person may terminate or amend any agreement, including a security agreement, with an individual bankrupt, or claim an accelerated payment, or a forfeiture of the term, under any agreement, including a security agreement, with the bankrupt, by reason only of the bankruptcy.

(2) If the agreement referred to in subsection (1) is a lease, the lessor may not terminate or amend the lease by reason only of the bankruptcy or that the bankrupt has not paid rent in respect of any period before the date of bankruptcy.

(3) No public utility may discontinue service to an individual bankrupt by reason only of the bankruptcy or that the bankrupt has not paid for services rendered, or material provided, before the date of bankruptcy.

(4) Nothing in this section is to be construed as

• (a) prohibiting a person from requiring payments to be made in cash for goods, services, use of leased property or other valuable consideration provided after the date of bankruptcy; or
• (b) requiring the further advance of money or credit.

(5) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is contrary to this section is of no force or effect.

(6) The court may, on application by a party to an agreement, declare that this section does not apply, or applies only to the extent declared by the court, if the applicant satisfies the court that the operation of this section would likely cause the applicant significant financial hardship.

Rationale

Contracting parties attempt to ensure that they deal with reputable and reliable co-parties. An extension of the principle may result in the inclusion of a clause stipulating that a future event that creates doubt as to the reliability of the co-party, may be a cause to terminate the agreement. The difficulty with such clauses is that they ignore the fact that the bankrupt may be fulfilling the agreement's terms and may continue to do so.

The intention of the reform is to ensure that agreements in good standing be respected by all parties. Therefore, the individual bankrupt, who is attempting to obtain his or her "fresh start", will not be unreasonably evicted from their home, denied basic and essential services or denied other benefits to which they would otherwise be entitled.

The co-party will not be forced, however, to provide free services or materials to the bankrupt. Except as described in subsections (2) and (3), the bankrupt is required to pay for all services or materials provided to them. In addition, the co-party is not required to provide credit but may demand immediate payment. As such, the relationship between the bankrupt and the co-party remains balanced.

Subsection (1) prohibits the termination of an agreement with an individual bankrupt solely because of the fact of the bankruptcy. The intention of the reform is to provide protection for the bankrupt's interests. The co-party maintains the right to terminate an agreement with the bankrupt for any other reason but the bankruptcy filing. The reform will enhance the estate of the bankrupt while not harming the interests of the co-party to the agreement.

Subsection (2) stipulates that a landlord may not evict a bankrupt only because of a bankruptcy or there is an amount for past rent outstanding prior to the bankruptcy. The provision applies only in respect of individuals - permitting a landlord to evict an individual only because of a bankruptcy or past obligations would cause a serious hardship on the individual. Balance in the relationship is restored, however, by requiring the bankrupt to pay rent on an on-going basis.

Subsection (3) stipulates that a public utility may not discontinue service only because the bankrupt owes for services rendered or material provided prior to the bankruptcy. The bankrupt is required to make payment for services and materials provided after the date of bankruptcy or the public utility would be entitled to discontinue service. Because public utilities provide essential services, permitting it to terminate service because of a bankruptcy or because an amount is outstanding would cause serious hardship to the individual bankrupt. Balance in the relationship is restored, however, by requiring the bankrupt to pay for on-going service.

Subsection (4) clarifies that the individual bankrupt is still required to comply with the terms of the agreement and that the co-party is not required to extend credit to the bankrupt. The provision extends the fairness principle to the co-party.

Subsection (5) clarifies that parties may not contract out of the constraints imposed by this provision. Because the provision applies only to individual bankrupts, the intention of the subsection is to ensure that when an individual is in an unequal bargaining position - for example, with a telephone service provider or other large, quasi-monopolistic enterprise - the individual would not be effectively forced to sign an unfavourable contract or be denied an essential service.

Subsection (6) provides that a party may seek court approval to terminate an agreement with the bankrupt only because of the fact of the bankruptcy where the party can satisfy the court that the party would otherwise suffer a serious financial loss. The intention is to reserve flexibility in the system.

Present Law

None.

Senate Recommendation

The reform follows Senate recommendation #16.