The recent decision of the Supreme Court of Canada in Saulnier (Receiver of) v. Saulnier has changed the basis for determining whether a licence is property under a provincial Personal Property Security Act (“PPSA”) and the federal Bankruptcy and Insolvency Act (“BIA”).
Introduction
This Note deals with the potential liabilities under English Law of the directors and officers (secretary and managers) of a UK company in the event of its (potential) insolvency.
Summary
Directors - and, to a lesser extent, other officers of a company - face a number of areas of potential personal liability. Of most relevance is the liability of the directors for ‘wrongful trading’.
The priorities of some pension claims on bankruptcy and receivership changed as a result of amendments effective July 8, 2008 to the Bankruptcy and Insolvency Act R.S.C. (Canada) (the “BIA”).
Priority Before the Amendments
The decision of the Ontario Court of Appeal earlier this year in Slater Steel* exposed 10 directors, officers and employees to possible personal liability of $20 million with no meaningful recourse against the insolvent Slater Steel or its assets. This is a reminder that failure to recognize and fulfill fiduciary obligations for a pension plan can expose you to substantial personal liability.
On July 7, 2008 specific provisions of the Insolvency Reform Act, 2005 and the Insolvency Reform Act, 2007 were proclaimed into force by Order in Council. As a result, the Wage Earner Protection Program Act (the “WEPPA”) and certain related amendments to the Bankruptcy and Insolvency Act (“BIA”) have come into immediate effect.
Certain of those amendments are intended to protect current and former employees of insolvent companies and will affect lenders to insolvent businesses.
The relationship between Canada and the United States is one of the closest and most extensive in the world. With the equivalent of $1.6 billion in bilateral trade every day3, it is no surprise that a large number of US companies have subsidiary operations and assets located in Canada. Despite numerous socio-economic similarities between both countries and legal regimes both anchored in the tradition of common law, there are a number of legal differences that have the potential to significantly impact US companies doing business in Canada.
Typically, courts will only rarely and sparingly interfere with contractual rights that parties freely negotiate and agree upon.
However, in Protiva Biotherapeutics Inc. v. Inex Pharmaceuticals Corp., the British Columbia Court of Appeal recently determined that the courts can adjust contractual rights in order to achieve a workable plan of arrangement proposed by a company under the British Columbia Business Corporations Act (the "Act").
In order to get the information necessary to seize a debtor's assets or garnish his income, Rule 60.18 of the Rules of Court permit a creditor to require a debtor to attend an examination under oath before a court reporter and be questioned in relation to:
(a) the reason for non-payment or non-performance of the judgment;
(b) the debtor's income and property;
(c) the debts owed to and by the debtor;
(d) the disposal the debtor has made of any property either before or after the making of the order;
Courts will only rarely and sparingly interfere with contractual rights that parties freely negotiate and agree upon.
However, in Protiva Biotherapeutics Inc. v. Inex Pharmaceuticals Corp., the British Columbia Court of Appeal recently determined that it could adjust contractual rights in order to achieve a workable plan of arrangement proposed by a company under the British Columbia Business Corporations Act (“Act”).
Should Lenders be Concerned?
In the United States, claims for “deepening insolvency” have been advanced against lenders and investment bankers to insolvent companies as well as against the officers and directors of insolvent companies. Experience suggests that developments in U.S. commercial laws tend to be imported north of the border.1 Accordingly, lenders should be aware of the existence of the theory of deepening insolvency and the risk of creditors attempting to use it in Canada.
What is Deepening Insolvency?