In September of 2014 federal Industry Minister James Moore tabled a report to Canada’s Parliament regarding the country’s insolvency laws. This report arises from a statutory provision requiring a periodic review of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA)—the two primary insolvency statutes in Canada. The Companies’ and Creditors Arrangement Act sets out how insolvent companies with more than $5 million in debt organize under court protection. This blog will focus exclusively on that part of the recently tabled report as it relates to the Bankruptcy and Insolvency Act (BIA)—which sets out a legislative framework for both personal and business insolvency.
Administrative framework of Canada’s insolvency regime
The administration of Canada’s insolvency regime is exclusively under federal jurisdiction and has three pillars:
Office of the Superintendent of Bankruptcy (OSB): regulator with oversight responsibility for the insolvency system
Trustees-in-bankruptcy: licensed by the Superintendent: they are responsible for administering estates and performing various roles under the BIA
Courts: adjudicate certain matter under the BIA including circumstances where a trustee or creditor goes to court to oppose a discharge
The OSB has the responsibility of supervising the administration of all estates and issues arising under the BIA. The duties of trustees-in-bankruptcy include administering insolvencies and providing advice to consumers and businesses experiencing financial distress. Where a debtor fails to fulfill his obligations, as an officer of the court, the trustee has a duty to bring this information to the attention of creditors and the court. Most individuals who file for personal bankruptcy never go to court but will obtain a discharge automatically after a specific number of months.
Legislative framework for Canada’s insolvency regime
Under the BIA an insolvent consumer or business might be able to seek protection from certain creditors, through a licensed trustee in bankruptcy, by filing for bankruptcy, or making a proposal. Where a debtor files for bankruptcy, all of the debtor’s property is transferred to the trustee subject to certain laws that exempt specific property from seizure, the trustee arranges for the sale of non-exempt property, and the trustee then distributes the sale proceeds among the bankrupt’s creditors. Alternatively, an insolvent debtor might choose an alternative to bankruptcy, referred to as making a proposal, in which case a trustee makes a proposal to certain unsecured creditors regarding repayment of a portion of their indebtedness—by making monthly payments–over a period not to exceed five years. A proposal made on behalf of a consumer is referred to as a consumer proposal and a proposal made on behalf of a business is called a business proposal.
The Superintendent of Bankruptcy, appointed by the federal government, is responsible for the administration of the Bankruptcy and Insolvency Act (BIA), supervising the insolvency regime in the country and maintaining its integrity. The Superintendent of Bankruptcy, also referred to as the Superintendent, supervises the conduct of approximately 1,600 private sector trustees in bankruptcy.
History of insolvency legislation in Canada
The Bankruptcy and Insolvency Act (BIA) was first enacted in 1919 and it underwent substantial reforms in 1949. Since then it was amended in 1992, 1997 and 2008-2009. It would be reasonable to anticipate that this Act will be amended at some point in the next few years. It would also be reasonable to expect that the federal Government will act on one or more of the issues raised in the recent report tabled to Parliament the next time Canada’s insolvency laws are amended. Under the Act the report is to be reviewed by a Parliamentary committee and to report back to Parliament within one year or some other time authorized by Parliament.
The most recent reforms of the BIA took place in 2009. These reforms included a number of provisions to make the bankruptcy system fairer and to prevent abuse. Debtors who had significant amounts of income tax debt were denied an automatic discharge in bankruptcy. Furthermore, debtors who earned more than approximately $30,000 had to make “surplus income” payments to the bankruptcy trustee and were required to wait longer to obtain a discharge from bankruptcy. Consequently, bankruptcy became much less attractive to high-income earners.
Need for a periodic review of Canada’s insolvency laws
One of the reasons why Canada’s Parliament has amended Canada’s insolvency laws from time to time during the past two decades is that the insolvency environment is evolving and it is important to ensure that legislation continues to meet its policy objectives. The bottom line is that there will always be consumers and businesses, who for a host of reasons, find themselves overwhelmed by debt. It is important that Canada’s insolvency laws are periodically updated to ensure they are modern, efficient, and not only play a positive role in Canada’s credit marketplace but also provide a fresh start for honest but unfortunate debtors overwhelmed by excessive debt.
The review process
Reforms to Canada’s insolvency laws in 2009 require the Minister of Industry to table a report to Parliament. Furthermore, Industry Canada has monitored the insolvency marketplace to identify trends and issues. In 2013 a comprehensive study of Canada’s insolvency regime was made to gain a thorough understanding of how Canada’s insolvency laws were working. This study included an examination of academic research and expert commentary of the following:
Domestic and international insolvency trends
Request for input from a wide variety of key stakeholders
Public consultation regarding Canada’s insolvency laws
In May of 2014 the Canadian Government began an on-line public consultation based on a 39-page Discussion Paper soliciting input from Canadians on key elements of Canada’s insolvency regime. This Discussion Paper dealt with three central insolvency-related themes, issues affecting consumers, as well as commercial and administrative issues. The consumer section dealt with protection of consumer interests, the “fresh start” principle, protections for families and consumers, and the treatment of student loans. The commercial section addressed protection of vulnerable creditors, enhancing equity, discouraging fraud and abuse, and cross-border insolvencies.
Subsequently, more than 70 individuals and organizations made written submissions. Interested stakeholders were also given the opportunity to meet with Industry Canada officials and make their views known in person or via teleconference. The recently tabled report was written after receiving approximately 70 submissions—industry organizations, bankruptcy trustees, unions, insolvency experts, as well as academics. You can read the Discussion Paper and submissions at:
Economic implications of insolvency policy
Insolvency law plays a key role in the economy, particularly in both consumer and commercial lending. Clear rules for lenders–and investors–as well as borrowers affects not only credit market risks, but also the cost and availability of credit. Canada’s modern insolvency legislation plays a positive role in attracting domestic and foreign investment. The fresh start approach to debtors with excessive debt encourages entrepreneurship. An efficient insolvency regime helps to ensure that debtors’ assets can be put to productive use quickly. Equitable treatment of stakeholders and a transparent insolvency regime protect the integrity of the commercial marketplace.
Policy objectives of Canada’s current insolvency laws
The recently tabled report sets out the policy objectives of Canada’s insolvency laws. Insolvency is a fact of life in a fluid, market-driven economy. It is inevitable that from time to time that some individuals and businesses will be overwhelmed with excessive debt. Countries have adopted different approaches as it relates to the legal and social consequences of insolvency. Canada’s current insolvency policy has been described as a “fresh start” approach that seeks to provide relief to honest but unfortunate debtors with excessive debts. Throughout the world this fresh start approach by governments to excessive debt has become more and more popular.
Insolvency law in Canada attempts to achieve the following:
Provides certainty in the marketplace
Balancing the interests of debtors with the interests of lenders extending credit on the expectation of repayment
Making the insolvency process as efficient as possible, while maintaining fairness
Attempts to ensure equitable treatment between similarly situated creditors
Maximize the value of assets
Recognizes existing creditor rights and established clear rules for ranking of priority claims
In 2008 the global economy experienced one of the deepest recessions since the Great Depression. In 2008 and 2009 Canada had a record number of personal insolvencies and several large Canadian businesses failed. Despite the fact that Canadian economic indicators have improved substantially since 2008 the risk of personal insolvency is a significant risk for many Canadians. Furthermore, many consumers are struggling with financial obligations involving both children and parents.
Over the past decade there has been a significant increase in the consumer debt to personal disposable income ratio among Canadians. In 2000 this ratio was 110 percent. By 2012 this ratio had risen dramatically to 160 percent. This increase can be explained by higher mortgage debt levels and the use of home equity to pay down other household debt. Today higher mortgage debt levels means that many Canadians are vulnerable to a decline in housing prices or an increase in interest rates.
Trends in consumer insolvencies
The consumer insolvency rate is the number of consumers per 1,000 residents aged 18 or older who have either filed for personal bankruptcy or entered into a consumer proposal. Over the past several decades the consumer insolvency rate in Canada has trended higher. During the past 10 years the consumer insolvency rate in Canada has held relatively steady between 4 and 5 consumers per 1,000 residents, peaking at 5.5 in 2008 during the depths of the last recession.
The rate of consumer insolvencies among Canadians vary by age. Canadian residents aged 35-54 are at the highest risk of insolvency. The consumer insolvency rate for this age group over the past ten years was between 6 and 7 insolvencies per 1,000, peaking at 9 insolvencies per 1,000 residents in 2008. The age groups with the lowest consumer insolvency rates over the past 10 years were those 65 and older, and those aged 18 to 24.
The rate of consumer insolvencies also differs by region in Canada. Over the past 10 years consumer insolvencies in the four western provinces have held steady or declined. In contrast, over the same period consumer insolvencies have increased in Ontario, Quebec, and the Atlantic provinces. The fact that consumer insolvency rates have been lower in the four western provinces may be influenced by higher economic growth and employment levels during the same period.
One of the objectives of 2009 BIA reforms was to increase the number of consumer proposals—as opposed to bankruptcies—for consumers. Between 2009 and 2012 consumer proposals as a percentage of total consumer insolvencies increased from 23 percent in 2009 to 40 percent in 2012.
Trends in business insolvencies
The business insolvency rate is the number of businesses insolvencies per 1,000 businesses operating in Canada. Since 2002 the business insolvency rate in Canada has fallen 70 percent. It is not clear why the business insolvency rate in Canada has fallen dramatically over this period. Compared with other countries, Canada has a lower per capita business insolvency rate.
One of the objectives of the 2009 BIA reforms was to encourage more business proposals—as opposed to bankruptcies—for businesses. Between 2009 and 2012 business proposals as a percentage of total business insolvencies, increased from 17 percent in 2009 to 25 percent in 2012.
Consumer issues addressed by stakeholders during public consultation
There was no consensus regarding a number of consumer issues identified in the Industry Canada’s Discussion Paper including responsible lending consumer deposits, and the discharge of student loans. There was, however, consensus among stakeholders in connection with four specific consumer issues set out below.
1. Registered Disability Savings Plans
When an individual files for personal bankruptcy certain property need not be surrendered to the trustee—property exempt under provincial law or the BIA. Stakeholders expressed a strong preference to see an exemption added to the BIA for registered disability savings plans which are intended to provide for the financial needs of severely disabled individuals when those who care for them are no longer able to provide support.
2. Provincial licence denial regimes
Provinces have jurisdiction over issuing licenses or permitting residents to engage in certain activities such as driving. Some provincial laws require that a person pay a debt owed to the province or another entity before being entitled to have a licence or permit issued. Provincial licence denial regimes not raise any issues where the debtor is solvent. However, it creates a problem where a bankrupt is unable to obtain a licence or a permit in connection with a debt which has been discharged in a bankruptcy.
There was a stakeholder consensus that provincial licence denial regimes should not apply to debts discharged under a bankruptcy.
3. Family law and equalization
It is common for family law issues to arise in bankruptcy proceedings. The BIA provides that child support and spousal support obligations are not discharged in a bankruptcy. In a recent Supreme Court of Canada decision a spousal claim for an equalization payment against property that was exempt from seizure under other creditors—but not as against a claim for equalization—was defeated. The Supreme Court suggested that insolvency laws should be amended so that similar claims in the future were protected.
4. Reaffirmation agreements
As a result of a bankruptcy discharge, a bankrupt can have most of his debts forgiven or discharged. It is common in some instances for a bankrupt to actually “reaffirm” or “reinstate” the debt. The report indicates that bankrupts, particularly those living in rural arears, will reaffirm a debt on a car loan in order to continue to be able to drive to work. At the present time a bankrupt may reaffirm a debt by conduct—making a payment on the debt following discharge from bankruptcy—or entering into a written contract.
Stakeholders indicated that reaffirmation was inconsistent with the fresh start principle. Concern was expressed that bankrupts might not appreciate the consequence of making payments following discharge from bankruptcy. Consequently, the majority of stakeholders supported placing limitations in the BIA on reaffirmation by conduct.
Commercial issues raised by stakeholders during public consultation
1. Intellectual property
There was significant consensus among stakeholders that insolvency laws as it relates to intellectual property be modernized. More specifically the language in the BIA needs to be updated to ensure that all types of intellectual property are included and treated appropriately.
2. Priorities as between creditors
From the perspective of creditors bankruptcy is seen as a “zero-sum game” because there are insufficient assets in a bankruptcy to satisfy all of a bankrupt’s creditors. Any changes to the existing ranking of priorities among creditors would not only impact all creditors but also could affect the cost and availability of credit in Canada.
A number of stakeholders—including employee groups, pensioners, fresh produce sellers, small businesses and tax authorities—sought priority in insolvency proceedings because they are vulnerable and require extraordinary protection. In contrast, lenders and insolvency practitioners—especially as it relates to financing inventory for farming–cautioned against protections that might impact on the cost and availability of credit. It was suggested that some of these protections for socially important claims would be better dealt with outside of insolvency law.
3. Cross-border insolvencies
The number of cross-border insolvencies has increased with globalization of the world’s economy. Some stakeholders suggested that reforms in Canada’s insolvency laws might be necessary to keep in step with a globalized economy. Other stakeholders expressed concern that any reforms should be consistent with conditions necessary to promote investment in Canada and to protect the interests of Canadian firms in global markets.
4. New financial products
Today new financial products are being introduced into the marketplace which assist business and investors manage risk including credit risk. At some future date reforms in Canada’s insolvency laws might be required to deal with these new financial products. Most stakeholders supported disclosure requirements which would provide greater transparency for other creditors and the courts. There was no consensus, however, in connection with changing priorities as between other insolvency stakeholders and these new financial products.
Administrative issues raised by stakeholders during public consultation
The current insolvency regime provides Canadians with excessive debt the potential for a fresh start. The administration of bankruptcies is done by private sector trustees. Accordingly, the cost associated—typically around $1,500—is determined by market forces. This amount may be prohibitively expensive for some people who should be filing for personal bankruptcy. Some stakeholders suggested that new options should be developed to enable better access for those seeking to file for personal bankruptcy.
2. Rationalization of insolvency legislation
At the present time insolvency laws in Canada can be found in six different laws administered by five different Ministers, as set out in the following chart:
Name of current insolvency statute
Ministry administering the statute
Bankruptcy and Insolvency Act
Companies’ Creditors Arrangements Act
Canada Corporations Act
Winding –up and Restructuring Act
Industry Ministry and Finance Ministry
Canada Transportation Act
Farm Debt Mediation Act
Ministry of Agriculture and Agri-Food
Many stakeholders expressed support for rationalizing the current legislative structure for Canada’s insolvency laws but there was no consensus as to how that objective could be attained.
3. Comprehensive review of the Bankruptcy and Insolvency Act (BIA)
The last comprehensive review of the BIA was conducted in 1949, with significant amendments from time to time since 1992. Some stakeholders suggested that a comprehensive review of the BIA might be warranted in order to eliminate some outdated concepts and provisions. There was some suggestion that the role and powers of the Superintendent could be enhanced.
A number of stakeholders raised a number of issues which were not directly related to insolvency law policy—taxation issues, the Wage Earner Protection Program, and the regulation of pensions. These issues could have an impact on the efficiency of Canada’s insolvency regime and could be included as part of a comprehensive review of the BIA.
Stakeholders clearly expressed their support for both the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act to be reviewed and updated from time to time in response to the evolving insolvency environment.
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