As the pace of restructuring activity in Canada continues to accelerate (see the partial listing below), international creditors should be aware that there are credit risks in doing business with a company that is restructuring in either of Canada's two restructuring systems. (These are, briefly, the Bankruptcy and Insolvency Act which is generally used for small to medium sized restructurings and the Companies Creditors' Arrangement Act which is generally used for large cases and resembles proceedings under Chapter 11 of the United States Bankruptcy Code).

In Seeley (Trustee of) v. Canadian Imperial Bank of Commerce (2008), the Bankruptcy Court determined that the Superintendent’s Levy was payable on the amount paid to a secured creditor by a Trustee in bankruptcy.The bankrupt made an assignment into bankruptcy. He owned a cabin which was mortgaged to the Bank.

The Trustee sent the Bank three notices requiring it to file proof of its security. The Bank did not respond.The cabin was sold and subsequently the Bank filed a Proof of Claim in the bankruptcy.

The U.S. doctrine of equitable subordination (as now set out in the U.S. Bankruptcy Code) allows a U.S. court to subordinate all or part of a creditor's claim to the claims of other creditors if the creditor has engaged in inequitable conduct that gives the creditor an unfair advantage or is injurious to the other creditors. Will the Canadian courts apply the doctrine?

For most lenders, taking security from their borrowers is pretty straightforward: take a general security agreement covering inventory, receivables and all other collateral, add some guarantees, and then look to see if there are any other loose ends that need tying up. But for businesses in regulated industries where some sort of government-issued licence is a threshold requirement, it's not that easy.

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

In Re Farmpure Seeds Inc. (2008 CarswellSask. 639) the Saskatchewan Court of Queen’s Bench considered the proposal of a debtor which was conditional upon the Court approving DIP financing and a super priority charge.

The debtor company had an active business, however became insolvent as a result of rapid expansion and some improvident contracts. The debtor could not meet its immediate obligations such as payroll, and the need to pay its suppliers upon receipt of their seed product. As a result, the debtor could not maintain its business without immediate interim financing.

The Supreme Court of Canada released its decision in Saulnier v. Royal Bank of Canada on October 24, 2008. The decision provides welcome clarification concerning the nature of government licenses and confirms that at least certain kinds of licenses constitute property for the purposes of the Bankruptcy and Insolvency Act (the “BIA”) and for the purposes of Canadian personal property security legislation. The decision is also important because it takes a purposive and commercial approach to the interpretation of bankruptcy and personal property security legislation.

Nortel Networks Corp. of Canada, one of the world’s leading suppliers of fixed line phone network equipment, filed for protection from creditors Wednesday under Chapter 11 of the U.S. Bankruptcy Code. A pioneer in the development of network switches, routers, and fiber-optic technologies used by many of the world’s top telecommunications carriers, Nortel ranked as Canada’s largest company by value at the height of the global telecom market boom of the late 1990s and early 2000s.

On July 23, 2008, the Canadian Government proclaimed into force amendments to the Bankruptcy and Insolvency Act (Canada) (the "BIA") that provide super-priority security to claims, subject to specified limits, for unpaid wages ("Unpaid Wage Claims") and unpaid pension plan contributions ("Unpaid Pension Contribution Claims") in a bankruptcy or receivership proceeding, effective as of July 7, 2008.

On July 7, 2008, the Wage Earner Protection Program Act (the "WEPPA") was proclaimed into force, along with complementary amendments to the Bankruptcy and Insolvency Act (the "BIA") and other related statutes. The new program protects a limited amount of the unpaid wages of employees when an employer becomes bankrupt or is placed into receivership, and the amendments to the BIA provide for the priority of some un-remitted pension contributions.

The Wage Earner Protection Program (the "WEPP")