Canadian Bankruptcy and Insolvency Act Reform-A Time for Input!

Article excerpt

May 2002 is the legislated date in Canada for reform of the Bankruptcy and Insolvency Act (BIA) and the Companies Creditors Arrangement Act (CCAA), the main federal Canadian insolvency statutes.

Prior to submission of reports to the Canadian Parliament in May 2002, discussion papers on commercial and consumer issues will be published seeking feedback from stakeholders. This will afford an excellent opportunity for credit and finance professionals to ensure that provisions important to the trade credit industry are considered and included in the new legislation.

The Corporate Law Policy Directorate of Industry Canada (Industry Canada) is spearheading the reform process. Discussion papers are being produced by the task forces established by the Office of the Superintendent of Bankruptcy (OSB), the Canadian Insolvency Practitioners Association and the Insolvency Institute of Canada, among others, and will be divided between commercial and consumer issues.

Commercial issues

Industry Canada identifies two key objectives for commercial insolvency law in today's global knowledge-based economy as efficiency and fairness. It defines the efficiency objective as assisting the economy in using its material and human resources to the best advantage and producing the highest possible output of goods and services. The fairness objective is to help ensure that the value preserved in insolvencies is distributed fairly and that the losses involved do not fall disportionately on the weaker parties.

Industry Canada's paper "Insolvency Law in the Global Knowledge-Based Economy" suggests that in an economy committed to competition, insolvency law should help competitive forces work effectively. It further states that Canadian insolvency law for the global economy and its growing integration in the North American economy should minimize the difficulties involved in working out international financing arrangements and managing cross-border insolvencies. Multilateral initiatives to promote more uniform insolvency legislation internationally should be carefully examined, and adoption of uniform laws should be considered in Canadian insolvency reform.

The central corporate issues under consideration for reform are generally as follows:

1. Unpaid supplier claims

Is the current protection adequate or should a super-priority protection be provided?

Current legislation provides unpaid suppliers the right to repossess (revendicate) goods by serving the purchaser with a written demand for repossession within 30 days after the delivery date of the goods to the purchaser, provided that the goods are: (a) identifiable, (b) in the same state as when delivered and (c) unsold. This right is enforceable in receivership or bankruptcy situations but not under a proposal.

Recommended changes and reforms include:

* Return of goods delivered within 15 days before bankruptcy, receivership or reorganization, provided demand is served within 30 days after the proceedings.

* Adoption of the US model, which permits goods to be reclaimed if demand is made within 10 days of delivery.

* Holding directors personally liable for stocking up or for the value of unpaid goods and services bought within a certain number of days prior to bankruptcy, receivership or reorganization proceedings, unless purchases can be shown to be in the ordinary course of business.

* Granting suppliers a statutory charge over current assets for goods and services delivered within 15 days.

* Allowing suppliers to buy goods back at a price as offered by a liquidator.

This right of revendication protects against "bulking up" of inventory prior to a proceeding so as to improve results for secured creditors (and quite likely their guarantors), at the expense of unsecured suppliers.

Since a commercial debtor requires access to its inventory to carry on business during a rehabilitation process, the 30-day goods provision does not apply to a proposal. …