by Ari Sorek of Dentons
On April 8, 2019, the federal government introduced Bill C 97, An Act to Implement Certain Provisions of the Budget Tabled in Parliament On March 19, 2019 and Other Measures, which includes proposed amendments to the Bankruptcy and Insolvency Act, as well as the Companies’ Creditors Arrangement Act. The proposed amendments include the following:
- Under the Bankruptcy and Insolvency Act (BIA), to:
- Require all parties in a proceeding under the BIA to act in good faith;
- Allow the courts to inquire into certain payments made to, among other persons, directors or officers of a corporation in the year preceding insolvency; and
- Impose liability on directors of corporations in respect of such reviewable payments.
- Under the Companies’ Creditors Arrangement Act (CCAA), to:
- Limit the relief provided in initial orders made pursuant to section 11 of the CCAA to what is “reasonably necessary” for the continued operations of the company;
- Require all parties in the proceedings to act in good faith;
- Allow the courts to issue orders compelling certain persons to disclose any aspect of their economic interest in respect of the debtor company; and
- Limit the time period of the initial stay of proceedings to a period of 10 days (instead of 30 days).
If Bill C-97 receives Royal Assent as currently tabled, there would be another, albeit minor, amendment of interest to licensed trustees. The BIA would be modified to (i) allow trustees to maintain electronic records instead of retaining originals of documents, and (ii) require that trustee licensing fees are paid on the date to be prescribed by regulation (instead of the fixed deadline of December 31 currently in force).
Duty to act in good faith
Both the BIA and the CCAA (collectively, the Acts), are being amended so as to statutorily entrench the obligation, incumbent upon “any interested person and any proceedings,” to act in good faith with respect to those proceedings.
Parliament’s intention to render good faith a statutorily-sanctioned obligation may be seen as a codification of the Supreme Court of Canada’s teachings in Century Services, wherein the Court wrote that “requirements of appropriateness, good faith, and due diligence are the cornerstones of restructuring proceedings”; “baseline considerations that a Court should always bear in mind when exercising CCAA authority”.1 Duties of good faith, transparency, cooperation, diligence, proportionality and reasonableness, are already imbedded, albeit to varying degrees, in the juridical fabric of our legal system across Canada. In Québec, the Civil Code (articles 6, 7 and 1375), and the Civil Code of Procedure (see its Preliminary Provision, and articles 19, 20, 51 et seq., 341, and 683), have codified these concepts. In common law provinces, in varying degrees and according to context, courts have also recognized a duty of good faith and transparency. The Supreme Court of Canada, in Bhasin v. Hrynew,2 has extended this obligation to contractual relationships, which are a core dynamic in restructurings, stating that it is “appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”
The BIA and CCAA contain numerous provisions, which, according to circumstances, require the courts to examine good faith and/or diligence of the parties. In fact, good faith is already a specifically required criterion when a debtor seeks a stay extension,3 and is statutorily mandated for trustees, receivers and monitors4. There are numerous other instances where Parliament has included good faith as a prerequisite for granting certain relief in insolvency contexts. In light of this, one may question why Parliament deemed it necessary to introduce these amendments at this time, especially in the context of budgetary measures.
The federal government deemed these and other measures necessary, further to consultations with Canadians, in the wake of certain recent high-profile restructurings, which yielded controversial outcomes from the perspective of certain stakeholders, including pensioners and workers. The inclusion of good faith as an overarching baseline obligation—applicable to all parties and under all circumstances—combined with the new obligations to be imposed upon directors, and the modifications to the Canada Business Corporations Act(CBCA) (namely section 122 of the CBCA), is intended to address, at least in part, Parliament’s stated objective to enhance retirement security for employees. The effort to provide additional protections to pensioners and workers in the context of insolvency proceedings, and even prior to restructurings generally, is part of the overarching theme of the Bill to improve governance standards and transparency.
The inclusion of good faith as a statutorily mandated duty will also add clarity to the courts’ role in dispensing certain relief. Currently, in the absence of statutory provisions containing such a criterion, and in keeping with the principle that courts should first interpret the (literal) provisions of a statute before turning to inherent or equitable jurisdiction,5 courts are sometimes reticent to exercise judicial discretion to examine good faith. Rather than hinging on whether or not good faith ought to be examined, the issues are likely to become more properly focused on whether parties have met the standard imposed by Parliament.
The proposed amendments may have the salutary effect of shepherding the notions of good faith and appropriateness from the background to the forefront, rendering good faith a form of threshold issue prior to obtaining all forms of relief. It will be specifically incumbent upon all parties involved to be mindful of this duty, in all aspects of the restructuring process and throughout the judicial proceedings, even well before they are commenced.
Directors’ liability and inquiry into payments made to directors or officers
The Government of Canada proposes to extend the criteria currently applicable to dividend payments or share transactions to other payments made to directors and officers of corporations, including termination pay, severance pay, or payment of incentive benefits. In fact, this scrutiny would also extend to “any person who manages or supervises the management of business and affairs of the corporation.” Accordingly, payments made to directors, officers and certain managers in the year prior to a bankruptcy event, will be examined, namely for the purposes of determining whether these payments were made while the corporation was insolvent or whether they rendered the corporation insolvent. The case law that has been developed6 in respect of impugned dividend declarations and share transactions will likely be applied to these payments. The burden of proof and grounds of defense currently applicable to such contexts would also be transposed into the analysis to which courts would now lend themselves in respect of payments made to officers, directors and certain managers.
The Bill also proposes to widen the scope of directors’ potential liability, through amendments to section 101 of the BIA. Such liability can be imposed if the court finds that the following three-pronged test is met: the impugned dividends or payments were accorded while the corporation was insolvent, or that they rendered the corporation insolvent; they were “conspicuously over the fair market value of the consideration received by the corporation”; and they were made outside the ordinary course of business. It stands to reason that with increased pressure being exerted on pension funds, and the increased sensibility to rights of pensioners and workers, directors and officers will want to obtain professional advice, and increase internal controls and best practices to better face this augmented scrutiny. In addition, certain protections are afforded, under certain conditions, to directors who will have formally protested such payments.
Disclosure of financial information
The Government of Canada is proposing to add a new section 11.9 of the CCAA to augment financial disclosure and transparency. Accordingly, on application “by any person interested in the matter,” the court may issue an order requiring “any interested person who is likely to be affected by an order made,” pursuant to the CCAA, to disclose any aspect of their economic interest in respect of the debtor company.
Although factors to be considered are provided at subsection 11.9(2) of the CCAA, it will be interesting to observe what kind of parameters the courts will impose on this procedural vehicle. Namely, the courts will be tasked with considering who qualifies to make or be the subject of such petitions in given contexts. Courts and monitors will also have to ensure that the rights of certain parties to obtain financial disclosure are balanced and proportional, in light of the broader policy considerations and the efficacy concerns of the CCAA, which are often heightened in the context of restructurings.
Initial order and comeback hearings
The Bill contemplates adding a new provision (section 11.001), requiring that initial orders be “limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period”.
It remains to be seen to what extent, if any, this provision will affect the model standard form of initial orders that have become the norm, especially in light of certain efforts to streamline them across Canada and, in other cases, to limit their scope. Should this provision be promulgated, it will be interesting to observe how it will be reconciled with section 36 of the CCAA, and how it will be interpreted in the context of so-called “liquidating CCAA proceedings”; that is, where the stated intention of the relief sought is not to ensure “continued operations of the debtor company” or preserve the debtor entity, but rather to maximize realization value of secured assets.
Moreover, in what will surely give added meaning to the expression “real time litigation,” the so-called “comeback hearings” would take place within 10 days from the initial order, rather than the current 30-day initial stay period.
Certain modifications relevant to trustees
In keeping with the times, the proposed amendments would dispense with the requirement to keep originals of various forms of records, including minutes, proceedings, resolutions, court orders and other documents. In addition, licence fees of trustees will henceforth become due on certain prescribed dates, rather than the fixed date of December 31.
Conclusion and next steps
These proposed amendments to the BIA and CCAA mirror those that are being proposed to the CBCA, also in Bill C-97, in respect of corporate governance, namely duties of good faith and new disclosure requirements relating to the well-being of employees, retirees and pensioners.
Bill C 97 is in its early stages. It completed its first reading in the House of Commons on April 8, 2019, with debates taking place thereafter. As the aforementioned measures contained in Bill C 97 are not tax related, and pursuant to the coming into force provisions of the Bill, the proposed amendments are not expected to be retroactively implemented.
Please note that Bill C 97 is considered an omnibus legislation that will seek to implement multiple unrelated matters, including budgetary measures, such that it is expected that Bill C 97 will receive Royal Assent, albeit with or without further amendments. Therefore, readers are cautioned that the foregoing may not apply to the final legislation that will have received Royal Assent.
For more information, please contact Ari Y. Sorek or another member of the Dentons Canada Restructuring, Insolvency and Bankruptcy group.