Overview of Canadian Bankruptcy Law

By Tighe, Gavin; DaRe, Vern | Business Credit, May 2004 | Go to article overview

Overview of Canadian Bankruptcy Law


Tighe, Gavin, DaRe, Vern, Business Credit


INTRODUCTION

A "crash course" in Canadian bankruptcy law was probably not considered necessary for many American credit executives a decade ago. With the passage of time, however, as our economies steadily integrate, insolvency proceedings increasingly ignore the 49th parallel. While American and Canadian insolvency and restructuring regimes share some similarities, they are different in other important respects. This article provides a brief overview of insolvency proceedings in Canada that every American credit executive should take into account when they are involved in such proceedings. It outlines Canada's legislative framework and briefly describes the bankruptcy regime and the formal restructuring alternatives available to debtors.

LEGISLATIVE FRAMEWORK

As a federal state, Canada has two sources of legislation that deal with creditors' rights. The federal government has exclusive constitutional authority to legislate over "bankruptcy and insolvency", and provincial governments have exclusive constitutional authority to legislate over "property and civil rights in the province," including the rights of secured creditors. Where a debtor is insolvent and federal legislation is applicable in the circumstances, that legislation is paramount. If the debtor is not insolvent, or if federal insolvency legislation is not applicable, the rights of creditors and debtors are governed by provincial legislation.

The two main federal statutes that deal with insolvencies are:

(1) the Bankruptcy and Insolvency Act ("BIA"); a highly codified statute that includes Canada's bankruptcy regime and a proposal regime, pursuant to which insolvent debtors can achieve compromises with their creditors; and

(2) the Companies' Creditors Arrangement Act ("CCAA"); a "skeletal" statute which permits the reorganization of insolvent companies and compromise of creditors' claims through a plan of arrangement.

Several provincial statutes also deal with creditors' rights. All provinces in Canada have separate regimes for the enforcement of security over real and personal property. While the rights and remedies of secured creditors may be stayed under the federal insolvency statutes--and even compromised in certain circumstances, secured creditors are generally entitled to enforce their rights whether insolvency proceedings have occurred or not.

BANKRUPTCY

Creditors may initiate bankruptcy proceedings in Canada by filing a petition against a debtor company. The petitioning creditor must be owed at least $1000 by the debtor, and must allege in the petition that the debtor has committed an act of bankruptcy within the six months preceding the date of the petition. The most common act of bankruptcy cited is that the debtor has ceased to meet its liabilities as they become due. The debtor is considered bankrupt once a receiving order is made against it, and the debtor's assets will then vest in the trustee in bankruptcy, subject to the rights of secured creditors.

The BIA also permits a debtor to commence bankruptcy proceedings. An insolvent debtor may file a voluntary assignment for the general benefit of its creditors. The debtor becomes bankrupt when the assignment is filed with the Official Receiver. A debtor who has made a voluntary assignment is in a similar position as a debtor who has been adjudged bankrupt pursuant to a receiving order.

BENEFITS TO SECURED CREDITORS

There are several reasons why a bankruptcy can be advantageous to a secured creditor, some of which relate to the interplay between federal and provincial legislation and the paramountcy of the federal legislation. For instance, provisions of various provincial and federal statutes that create priorities for certain types of claims, such as claims for unremitted sales taxes and unpaid vacation pay, become ineffective upon bankruptcy. Secured creditors, therefore, sometimes initiate bankruptcy proceedings in conjunction with other enforcement proceedings in order to maximize their recovery. …

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