Amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) have recently come into force that purportedly protect licensees of intellectual property (IP) if their licensors become insolvent or bankrupt. There are, however, a number of uncertainties surrounding the scope of protection afforded by these amendments. Until these uncertainties are resolved, licensees may wish to consider augmenting their statutory rights by contractual and other legal mechanisms. A Bankruptcy Remote Entity (BRE) is one potential mechanism.

Credit agreements typically provide that any amendment permitting the release of “all or substantially all” of the collateral requires the unanimous consent of the lenders. Many market participants expect that this provision provides protection against the agent and other lenders from consenting to the sale of the collateral and releasing the corresponding liens without the consent of all lenders.

The recent steady drumbeat of Chapter 11 bankruptcy filings is producing an equally persistent corollary: creditors receiving new securities issued by the reorganizing debtor or a related party in full or partial satisfaction of the creditors’ claims. Some of these creditors-cum-investors never planned to receive securities. The paradigmatic example is a creditor that enters into a normal business transaction resulting in an obligation that the debtor company hasn’t yet satisfied when it files for reorganization.

In Canada, there is more than one insolvency regime available to an insolvent company that wishes to restructure its debts and operations. However, the most commonly used regime for large companies ? and sometimes for smaller companies, because it is the most flexible ? is the Companies’ Creditors Arrangement Act (Canada) (CCAA). The most commonly used regime for smaller companies or less complicated restructurings is proposal proceedings under theBankruptcy and Insolvency Act (Canada) (BIA).

CCAA

There has been no shortage of victims in this financial crisis. Pensions and retirement savings have been severely reduced, jobs have been lost and once powerful financial institutions have failed. But, there is, perhaps, another victim that has largely gone unnoticed: the rule of law.

In his Evil Empire speech before the British House of Commons in June 1982, President Ronald Reagan refocused American political values on the rule of law.

The Ontario Court of Appeal has approved a creative use of the Companies’ Creditors Arrangement Act (CCAA) designed to unfreeze the $32-billion Canadian market for asset-backed commercial paper (ABCP).

As has been widely publicized, the Canadian ABCP market froze in August 2007 as a result of concerns in world credit markets arising from the US subprime mortgage crisis. After the market froze, a Pan-Canadian Investors Committee was formed to attempt to restructure it.

Nothing is certain in today's financial crisis - except that the legal system will be sorting out the rights and obligations of financial market participants for years to come. This is especially true for participants in the over-the-counter derivatives markets.

This memorandum provides an overview of the practical issues facing a sub-participant under a Loan Market Association ("LMA") English-law governed sub-participation agreement as the creditworthiness of grantor deteriorates.

Given the state of the economy, it will not be a rare occurrence in the short term for a supplier to receive a request to sell and deliver further goods to a purchaser who has filed proceedings under the Companies Creditors Arrangement Act (CCAA) or Chapter 11 of the United States Bankruptcy Code — and who is already indebted for unpaid pre-filing sales.

Boards of directors of troubled companies must balance their fiduciary obligations to shareholders and creditors. Insolvent companies owe duties to creditors and not solely to shareholders and, under evolving case law, companies acting in the "zone of insolvency" owe a duty to creditors as well as to shareholders.