Q. 1 Why do insolvency reform now?
- An efficient, well-functioning insolvency system is vital to the economy.
- Past reforms in the 1990s left many issues unresolved and new issues have emerged with the marketplace changing rapidly.
- It is important that marketplace framework laws, such as insolvency laws, be kept up to date and respond to the needs of the market.
Q. 2 Who is demanding changes to the insolvency system?
- Extensive consultations were conducted and indicated a broad consensus for reform to modernize Canada’s insolvency laws.
- The proposals reflect the input received from a broad spectrum of stakeholders: insolvency practitioners, representatives of the financial and business communities, labour groups, consumers associations and members of the academic community.
- The Senate Committee on Banking, Trade and Commerce also conducted public hearings in 2003 and made a number of recommendations for changes to the law.
Q. 3 What are the key elements of the reform?
- The reform has four main objectives:
- It will encourage restructuring of viable businesses as an alternative to bankruptcy. In this regard, the Companies’ Creditors Arrangement Act (CCAA) will be significantly modified to provide increased predictability while preserving its flexibility.
- It will improve the protection for workers in bankruptcy. The Bill creates the legislative framework for the Wage Earner Protection Program (WEPP), which will ensure that workers get compensation for their unpaid wages.
- The Bill is designed to make the insolvency system fairer and to reduce potential for abuse. For instance, the Bill introduces an exemption for RRSPs and lowers the period of discharge for student loans while it tightens the rules for debtors with surplus income and those with high-income tax debts.
- The Bill contains a number of technical amendments to improve the administration of the insolvency system.
Q. 4 Do the proposals follow the recommendations of the Senate Committee?
- The work of the Committee was very helpful and provided a solid basis to develop many of the proposals.
Q. 5 How does the Bill relate to the Private Member Bill C-281?
- This Bill proposes a comprehensive reform to Canada’s insolvency system.
- Bill C-281 only deals with workers’ claims and would provide for an unlimited super priority for all employee-related claims, including pensions. Because of the potentially very large amounts involved, Bill C-281, if adopted, would adversely affect credit availability and competitiveness, and would have negative impact over time on employment and the continuation of defined benefit pension plans.
- The proposed Bill will enhance the protection of employees while minimizing the adverse impact on credit.
Q. 6 How does the Bill improve the protection for workers in bankruptcy?
- The Bill provides the legislative basis for the creation of the WEPP, which will guarantee payments to employees for any unpaid wages and vacation earned, but not paid, up to a maximum of $3000, at the time their employer enters bankruptcy or receivership under the BIA.
- With the WEPP, payments of workers’ claims will no longer depend on the asset value of the bankrupt employer (less than 20 percent receive payments now) and the payments will be done in a more timely manner.
- The BIA is also amended to provide for a super priority (above secured creditors) for unpaid wages applicable to current assets (i.e. cash, accounts receivables and inventories), up to a maximum of $2000.
Q. 7 Why is there a super-priority if there is a Wage Earner Protection Program? Can the two measures be combined?
- These two measures are intended to work together, but are not cumulative. An employee who has an unpaid wage claim will get paid up to a maximum of $3000 through the WEPP. The government will take the place of the employee in the bankruptcy proceeding to recover amounts payable to the employee. This will ensure an element of cost recovery for the government in making payments under the WEPP.
Q. 8 Are pension plan and pensioners granted better protection in bankruptcy?
- There is very limited scope to deal with pension issues within an insolvency context, especially the issue of unfunded liabilities, which is more appropriately dealt with under the relevant pension regulatory system.
- The Bill will, however, contain a new explicit provision to ensure that arrears in regular pension contributions that have not been remitted to the pension plan by the employers constitute a priority charge over all assets (ahead of secured creditors).
Q. 9 How are the changes going to facilitate restructuring as an alternative to bankruptcy?
- Amendments to the CCAA and BIA will provide more guidance to the restructuring process to achieve the necessary degree of predictability and consistency in the application of the law, which is essential to investors, creditors, employees and other interested parties in developing a successful restructuring plan.
- In general terms, the Bill introduces rules governing the treatment of interim financing, the termination and assignment of contracts, the possibility of renegotiating collective agreements, as well as procedural improvements to facilitate participation of interested parties during the restructuring.
Q. 10 Are the changes to the CCAA prompted by what happened in the recent major restructuring cases (e.g., Air Canada or Stelco)?
- The CCAA has not been substantially modified since its enactment in the 1930s. Its use has significantly increased over the past decade and concerns have been raised that it lacks predictability.
- The changes to the CCAA are designed to provide more statutory guidance to assist the Court in its supervision of the restructuring while still preserving a degree of flexibility in order to take into account the complexities and particularities of major restructuring cases.
Q. 11 Will the law provide for the reopening of collective agreements?
- Yes. The legislation will provide a mechanism that would permit the judge overseeing a reorganization process to authorize the company to seek to renegotiate the collective agreement under the relevant labour legislation. However, the judge cannot impose a new collective agreement.
- The existing collective agreement remains in force unless an agreement is reached between the company and its employees.
- If there is no agreement to change the collective agreement, it will be up to the creditors to accept or reject the reorganization plan with the existing collective agreement.
- If there is an agreement to change the collective agreement, any concession made will be considered an unsecured claim in the restructuring process.
- The provision of explicit rules in this regard will do away with a major source of uncertainty in a restructuring process, for both the employees and employers.
Q. 12 Are the proposals in keeping with what is being done in the United States, under Chapter 11?
- No. Canadian Corporate restructuring procedures under the CCAA are generally considered by insolvency experts to be faster and cheaper than under U.S. Chapter 11. While many of the new provisions added to the CCAA deal with issues that are also included in the U.S. law, it is generally done in a less prescriptive manner so as to preserve greater flexibility for the Court to exercise discretion on a case-by-case basis.
Q. 13 Does the Bill propose changes to better protect RRSPs in bankruptcy?
- Yes. One of the key objectives of the reform is to correct some inequities in the treatment of personal bankruptcy. Accordingly, a new exemption from seizure will be provided for all RRSPs, in order to eliminate the differential treatment that currently exists depending on the type of RRSP and the individual’s province of residence in Canada.
Q. 14 Does the Bill propose changes to the treatment of student loans?
- Yes. Student loans will be eligible for automatic discharge after seven years instead of 10 years. In cases of hardship, the discharge will be able to be granted after five years instead of 10 years.
- The reduction in the period of discharge is intended to coincide with the exhaustion of the debt relief measures under the Canada Student Loans Program.
Q. 15 Does the Bill make it harder for people to declare bankruptcy when they have significant income?
- Fairness dictates that people who have the financial capability make efforts to reimburse their creditors.
- The Bill provides that individuals with surplus income (i.e. the bankrupt’s income is above the low-income cut-off threshold) will be required to pay a portion of their surplus income to their creditors for an additional period of 12 months from the date they are eligible to be discharged from their debts. This will affect approximately 20 percent of the current bankrupts.
Q. 16 Are there specific measure to prevent individuals to eliminate their tax debts by filing for bankruptcy?
- Any individual who has more than $200 000 in income tax debt that represents more than 75 percent of his/her total debts, will no longer be entitled to automatic discharge. He/she will need to apply to the Court for discharge and the Court will be empowered to impose conditions on the discharge (e.g. require a partial payment over a specific length of time).
- More than 700 individuals who filed for bankruptcy last year had income tax debts above $200 000. Typically, these individuals are self-employed professionals who earn significant income or have good prospects of earning significant income in the near term.
Q.17 Does the Government expect that the number of personal bankruptcy will be reduced by the proposed reform?
- The number of insolvencies is tied to many factors, including the economic and personal circumstances, employment and interest rates, and level of indebtedness.
- There is no optimal number of bankruptcies in any given year. The key is to ensure that the insolvency system is equitable in sharing the burden of bankruptcy, respects the fundamental objective of a fresh start and is responsive to market needs.
Q. 18 Is the reform going to make it more difficult for individuals to file for bankruptcy?
- No. Access to the bankruptcy system will essentially remain the same as it is now. A number of technical amendments will be made to clarify the law and streamline the administration of the system to improve its effectiveness.
Q. 19 When are these changes expected to take effect?
- All the proposed changes to the legislation will be applicable to bankruptcy filed after the entry into force of the Act.
- The government will decide the entry into force once Parliament approves the Bill and the Regulations have been developed.