Amendments to the BIA and CCAA
The BIA and CCAA rules are being modernized through a comprehensive insolvency reform package referred to as ‘Bill C-12’. The following section discusses some of the important changes proposed in the BIA and CCAA regulations.
Wage Earner Protection Program Act (“WEPPA”)
The newly established WEPPA provides super-priority to arrears of wages and pension contributions over the claims of other secured creditors and compensates employees for amounts earned, but not paid, during the six months preceding the bankruptcy or receivership of their employers under the BIA. This compensation will be made out of the Consolidated Revenue Fund. The WEPP is expected to protect workers by providing a guaranteed payment of a maximum of $2,000 in respect to wages, salaries, commissions or compensation for services rendered, and up to $1,000 related to costs owed to travelling salesmen.
In debtor-in-possession financing (also referred to as ‘interim financing’ or DIP), a new lender provides capital to a business that is undergoing reorganization, and has a priority in claims above the existing creditors. This helps the insolvent company carry on business. While DIP financing compromises the claims of other creditors, there can be benefit if there is a reasonable prospect of a viable restructuring plan. Until recently, the BIA and CCAA had no provisions regarding DIP financing. However, the new section 50.6 of the BIA and new section 11.2 of CCAA permits a new lender to have higher priority over the existing secured creditors.
Shareholders’ Role in Reorganization
Bill C-47 addresses the shareholder's role in preparing and implementing a reorganization process. It is remarkably similar to the U.S. legislation where the rule of ‘Absolute Priority’ rules when analyzing a shareholder’s role during the corporate reorganization proceedings. Bill C-47 states that the interests of shareholders will be subordinated to the company’s creditors and will not have any right to vote on the restructuring plan proposed by the insolvent company. While it deprives the shareholders of any involvement company in the decision-making process, it does not restrict them from participating in the implementation of a restructuring plan. They have the right to contest a plan once it is prepared and accepted on the grounds that it is not fair or just.
A company may face financial difficulties due to a weak business model despite being profitable in the future. The BIA and CCAA laws provide ample opportunity for a company that is unable to pay its debts but has a viable business. An honest reorganization and restructuring effort on the part of the insolvent company can benefit all the parties which would be affected by its bankruptcy. The laws also provide relief to an insolvent company’s creditors by providing them the opportunity to contest the bankruptcy and reorganization proceedings on the grounds of unfair practices. Lastly, they also make sure that an honest effort has been put forward by the insolvent company through proper monitoring by a court appointed trustee.
What happens when a company goes bankrupt?
The process of Bankruptcy
Different types of creditors
Priority of claims in a business liquidation
Secured and unsecured creditors
Amendments to the BIA and CCAA