Lenders are often counseled about fraudulent conveyance risks when they engage in financing transactions. It is usual, customary and the norm for steps to be taken to attempt to reduce such risks, including obtaining solvency and fairness opinions and using so-called savings clauses in loan documents. These undertakings and features notwithstanding, when a borrower or guarantor files a chapter 11 petition, often fraudulent conveyance claims are threatened, used as leverage, and settled within the context of a plan of reorganization.

With a number of Canadian companies seeking bankruptcy protection over the past few months, it has become apparent that the defined benefit pension plans sponsored by many of these companies are underfunded. As retirees and former employees protest their shrinking pensions, many are left asking how this all happened.

On September 18, 2009, the Federal Government proclaimed into force the remaining amendments to the Bankruptcy and Insolvency Act (BIA) and theCompanies’ Creditors Arrangement Act (CCAA). (A few provisions which are rendered moot, presumably deemed unnecessary or are amendments intended to coordinate the inter-governmental flow of information have not been proclaimed into force.) Some of the key changes to the BIA and the CCAA which we anticipate will considerably impact current Canadian insolvency practice are discussed below.

In August 2009, an English court sanctioned the use of a scheme of arrangement to restructure the debt of IMO Car Wash Group, a highly leveraged UK based car wash company. This decision follows the similar use of schemes of arrangements in other restructurings. For example earlier this year an English court sanctioned the use of a scheme in the debt restructuring of McCarthy & Stone. In both of these restructurings, the subordinated creditors were left with no value for their debt claims.

In August 2009, an English court sanctioned the use of a scheme of arrangement to restructure the debt of IMO Car Wash Group, a highly leveraged UK based car wash company. This decision follows the similar use of schemes of arrangements in other restructurings. For example earlier this year an English court sanctioned the use of a scheme in the debt restructuring of McCarthy & Stone. In both of these restructurings, the subordinated creditors were left with no value for their debt claims.

Canada’s insolvency and restructuring regime consists primarily of two separate statutes that have been substantially amended in recent years to align their restructuring provisions. Despite some similarities with its U.S. counterpart, the amended Canadian regime remains distinct.

Currently, neither the Bankruptcy and Insolvency Act nor the Companies’ Creditors Arrangement Act defines “director.” However, pending legislative amendments to the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) will include an expansive definition of “director” that includes any person “occupying the position of director,” regardless of his or her formal title.

As we have recently noted, the federal banking agencies have worked together to expand the pool of investors eligible to bid to acquire failing depository institutions. See our 21st Century Money, Banking & Commerce Alert entitled “OCC Approves Shelf Charter for National Banks to Encourage New Investment” (Nov. 25, 2008). The Federal Deposit Insurance Corporation (“FDIC”) has recently modified the receivership process in less obvious ways that also may have important ramifications for investors. 

Distressed preferred shares are an important weapon in the arsenal of a restructuring lawyer. They allow distressed companies to reduce their borrowing costs by restructuring their debt in a way that gives a taxable Canadian resident corporate lender a tax-free return. This means that the lender can accept a dividend rate that is less than the interest rate on the debt it holds and receive the same economic return without losing the priority that came with holding secured debt.

On July 28, 2008, the Federal Deposit Insurance Corporation (“FDIC”) published for comment a proposed rule that would require certain troubled depository institutions to maintain records of their qualified financial contracts (“QFCs”) in order to provide the FDIC with basic information when the agency is appointed as receiver. 73 Fed. Reg. 43635. Comments on the proposed rule must be received by the FDIC by September 26, 2008.