Insolvency procedures involving companies are complex and generally take a long time to complete. There is plenty of jargon which adds to the confusion, whereas all that an unsecured creditor usually wants to know is how to make a claim for the monies owed to him by the company, to whom the claim should be made, how long it will take to decide the claim and whether there is a possibility of recovering any monies from a company which is obviously experiencing financial difficulties.

The underlying policy of the Insolvency Act 1986 is that all assets of an insolvent organisation must be made available for distribution amongst its creditors. However, the courts also have the power to prevent parties from contracting out of the statutory regime. This long established common law principle known as the anti-deprivation principle has been used by the courts over the years to strike down contractual provisions which attempt to do just that. The principle has received an airing in two recent High Court decisions.

In the continuing uncertainty of the current economic climate, and with a tough financial regime introduced by the new government, landlords may still find themselves faced with an insolvent tenant.

The law has for years tried to grapple with the Gordian Knot between protecting a debtor’s assets for realisation and distribution to his creditors and protecting third parties who enter into transactions with the debtor after the bankruptcy process has been initiated, completely unaware of that process.

The restructuring proceedings of Canwest Publishing Inc and affiliated entities (“Canwest”) has recently provided secured lenders and particularly debtor-in-possession lenders with some food for thought.

In March of this year, four former non-unionized employees of Canwest brought a motion in the Ontario Superior Court of Justice (the “Court”) for the appointment of representative counsel to protect the interests of themselves and similarly situated former employees in the Canwest Companies’ Creditors Arrangement Act (“CCAA”) restructuring proceedings.

On September 18, 2009, after years of Parliamentary delay dating back to 2005, wide-ranging amendments to Canada’s Companies’ Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act (BIA) (the “Amendments”) came into force, providing, among other things, new protections for licensees of intellectual property.

It is important to note that the Amendments only apply in the CCAA restructuring and BIA proposal context, and not to conventional bankruptcies or receiverships.

Directors and officers of corporations are often subject to potential personal liabilities as a result of their positions. This potential for personal liability may be increased in the insolvency context, where a corporation’s creditors will seek to collect on certain debts from alternate sources, such as directors and officers. Directors and officers often utilize insurance and various court mechanisms in order to mitigate their personal liabilities.

On October 30, 2009, the Supreme Court of Canada released its long-anticipated decision in Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny. At issue in this case (and two companion cases) was the legal characterization of Crown rights with respect to collected but unremitted GST and Quebec sales tax (QST) in the hands of a trustee in bankruptcy. The Supreme Court confirmed that the Crown is an ordinary unsecured creditor with respect to such amounts, subject to the rights of prior ranking security holders.

Summary of Facts

The highly publicized announcement by Nortel Networks Corporation (together with its subsidiaries and affiliates, “Nortel”) of its intention to sell certain of its businesses has provided an opportunity for the Ontario Superior Court of Justice to settle the state of the law in Ontario (and, hopefully, across Canada) on the sale of all or substantially all of an entity’s assets within a Companies’ Creditors Arrangement Act (“CCAA”) proceedings.

Debtor-in-possession financing (“DIP financing”), which is new short-term financing obtained by an insolvent company after the commencement of an insolvency proceeding, is a recurring theme for two primary reasons. First, insolvent companies are generally desperate for an immediate infusion of cash to sustain operations. Second, creditors will usually provide such financing only on a super-priority basis, jumping ahead of existing secured creditors of the insolvent company.