By Joanne Paulson

Insolvency court in Canada continues to function largely in a business-as-usual fashion, yet there are inevitably challenges and changes over time that must be confronted by all parties.

In the days of the COVID-19 pandemic lockdown, for example, virtual hearings became necessary to avoid the complete stalling of the justice system, and they remain a much-used option today. Yet, for the most part, insolvency cases continue under the eyes of a bench focused on moving decisions expeditiously and fairly through the courts, say judges from three Canadian jurisdictions.

Mediation and Contempt

Insolvency cases almost always begin with mediation. In some jurisdictions, there is no choice.

“In Ontario, you have to have had a mediation,” said the Honourable Michael A. Penny, former Judge of the Ontario Superior Court of Justice, Commercial List. “You don’t get a trial date until you’ve done mediation. It’s built into the system. A lot of other proceedings are not commenced as trials; they proceed on a paper record with written material and so on, and then an argument before a judge based on that written evidence. You don’t have to have a mediation in that circumstance.”

Indeed, across Canada, judges rarely must force mediation. “In most cases, people are quite willing to engage in voluntary mediation,” said Madam Justice Shelley Fitzpatrick, supernumerary judge of the B.C. Supreme Court. When necessary, the ultimate strategy is a court order. However, from the court’s perspective, “it’s fair to say it could be called a last resort,” she said. “To put it in context, when commercial parties come to court, they’re well attuned to the vagaries of litigation, the costs of delay.”

The Honourable Barbara Romaine, K.C., retired judge in Calgary, Alberta, said mediation is not a major problem in insolvency matters because the parties are very interested in settlement and having matters sorted in an efficient and timely way. It’s part of the monitor’s or receiver’s job to identify and negotiate contested issues, she said. “I can’t say I was ever in a situation where I had to prompt the parties or the monitor to attend mediation other than in an informal way.”

While getting parties to the table before trial is not a significant problem in Canada, contempt does seem to be on the rise. Fitzpatrick said while she has not personally seen an increase in contempt orders, she perceives that other jurisdictions have, and has seen more papers being written on the topic. “There are always bad actors out there,” she noted. “Recently my own experience in that area came from Greg Martel or the My Mortgage (Auction Corp.) case, a Ponzi scheme Martel was perpetrating on investors. He sucked in over $200 million in assets and when I got involved and started issuing court orders, he pretty well ignored them and fled the jurisdictions. There’s a contempt order, actually an arrest warrant, out for him.”

She said the increasing prevalence of contempt is a product of the volatile economic situation Canada sees itself in. “In bad economic times, which I think is fair to say we are in, you can see desperate behaviour by people in terms of who they deal with and why. You can also see opportunistic behaviour by people who prey on those vulnerable or desperate people.”

In Penny’s experience, too, contempt was rare. In his 16 years as a judge, he did not hear more than about a dozen contempt proceedings. He believes this is partly because of the quality of lawyers involved. “There’s a big issue with unrepresented litigants because the cost of legal proceedings has become such that many people can’t afford lawyers, or at least big ones,” he said. People not represented by legal counsel are often unaware of how to proceed and may become angry or belligerent. “When orders are made, they have to be enforced, and if people are not obeying them, you have to do something about it,” he said.

Neither has Romaine yet seen an increase in contempt in insolvency matters, but that is not to say contempt isn’t a growing issue. “Of far greater concern to me is what’s happening in the United States with respect to government lawyers accused of lying to the court, misrepresenting facts or defying court orders. This is something we have not seen in Canada.”

However, there are some warning signs. She points to the recent decision of Alberta Court of King’s Bench Justice Colin Feasby, who ruled on the case of the Chief Electoral Officer of Alberta v Sylvestre. Feasby found that a proposal for referendum on Alberta independence would violate the constitution in a “very thorough, lengthy, well-reasoned decision,” Romaine said.

The Alberta government, however, tabled a bill the day before Justice Feasby issued his decision removing the chief electoral officer’s ability to state a special case to the court and declaring any existing special cases to be discontinued without costs to any party. As the decision notes, “the legal consequences of discontinuing this proceeding prior to a decision would be to silence the Court.”

Since the legislation had not yet been passed, the Court issued its decision, commenting that “[b]y attempting to change a new law…after the many participants in this matter have made significant expenditures of time and money to litigate on an accelerated basis is contrary to the rule of law.” Romaine’s view is that the case “illustrates more of a threat to the rule of law and respect for the courts than individual acts of contempt.”

Penny agreed that at a high level, “I did see a decline in the level of respect afforded to the court. I don’t know why. I think COVID had something to do with it. I think having to come into the courtroom, the size of it, the layout, the way people behave, I think that has an impact on people’s respect for the process. If it’s a screen on a computer, it has less impact. I also qualify what I just said by adding, I don’t think it’s a huge increase by any means.”

Discretion and Codification

Judges continue to retain considerable discretion despite the trend toward increased federal codification of insolvency law under the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA).

“The last major amendments to the BIA and CCAA took about 10 years of consultation before they were enacted. I think these codifications in that last go around are useful and positive,” Romaine said. “The last amendments were designed to mirror things that were happening commonly in insolvency practice. I think that cautious approach should continue.”

“Most of the codification laws come out of exiting case law anyway,” Fitzpatrick said. “Even when you look at the existing codification provisions in the act, you see that Ottawa has left significant room for judicial discretion.”

Under section 11 of the CCAA, the court may make any order that it considers appropriate in the circumstances, Penny said. “I don’t view the codification of certain practices and legal tests for when you should or shouldn’t grant a particular order in particular circumstances as being a general constraint on discretion.”

One area where judicial discretion is crucial is non-consensual third-party releases. These releases are granted to parties such as company managers and employees so that they cannot be sued after a bankruptcy. Judges are looking at the releases carefully and critically, particularly in light of the Purdue Pharma case in the United States in which the family owners were found liable for oxycontin addiction. In Canada, these releases are generally accepted under the CCAA; in the U.S., they have never been allowed, except in a few cross-border cases.

“What has changed in terms of these releases is that, speaking for myself, I have to put a more critical eye to when those releases are appropriate,” Fitzpatrick said. “In years past, everybody thought everyone who touched the file including the dog catcher and seven of your cousins were entitled to release. Whoever is getting a release has to be justified. There are the usual people who are getting the release: the monitor, the monitor’s counsel, those in the thick of the file, and quite appropriately they are given that added protection. For other parties, counsel must be prepared to come to court and justify the release,” she added.

Penny noted that Ontario Superior Court Chief Justice Geoffrey Morawetz has laid out the third-party release considerations and everyone applies them. “The law has evolved and there’s a series of factors the courts have said you have to take into account. One of them is, did they contribute to the bankruptcy? Were they active participants? Did they co-operate?”

Romaine said these considerations include whether the claims are rationally connected to the purpose of the plan; whether the plan can succeed without such releases; whether the parties released were necessary to the restructuring; whether the releases benefit the debtors as well as the creditors; and whether the creditors voting on the plan have knowledge of the nature and effect of the release.

Taking business efficiency into account

Judges also weigh business efficiency with legal principles when making decisions. “The whole point of insolvency resolution is balancing business efficiency with legal principles, with fairness and reasonableness,” Romaine said. “Yes, it’s sometimes difficult. But the goal is to respect and recognize business efficiency without sacrificing legal principles.”

It’s not always just the business itself judges must keep in mind, Penny said. There is also the wider community. “The business issue might be better if you did it a certain way, but it’s not consistent with the legal principles that apply to a case, which is intended to be for the protection of everybody. In fact, the Reverse Vesting Order (RVO) question engages this very issue. If you sell the shares in the business, the person gets the company. They get the assets but also get all the liabilities. The RVO is trying to split those things so you get the good stuff and shed the bad stuff. With everything that’s done in insolvency, there is a loser. In general, what we’re trying to do is accommodate business needs in the context of the insolvency regime. We’re trying to maximize value, save jobs, that kind of thing.”

Legal principles and the application of law “is what we judges do,” Fitzpatrick said. “But having said that, that law operates within a certain context. There’s lots of case law that talks about how insolvency proceedings operate in the real world, the business world. Judges know we don’t judge in a vacuum. We’re all commercial people. I’ve never encountered any Canadian insolvency judge who isn’t attuned to reality.”

Virtual hearings here to stay

COVID, too, has had a lasting effect on reality. Judges have become more amenable to virtual hearings, although there still some preference for in-person court appearances. “I am firmly of the view that counsel should be getting back into the courtroom to the extent that they can,” Fitzpatrick said. “What the whole COVID virtual hearing thing has taught us, like anything else, it could be good or bad.”

She said she has refined her earlier position and is less opposed to virtual appearances. “They’ve been very beneficial in a way. If you have counsel in another province who doesn’t want to get on a plane and spend thousands of dollars attending a hearing, I regularly give approvals.”

In Ontario, the virtual versus in-person decision post-COVID has come down, largely, to time. “I like where we landed on the Commercial List in Toronto,” Penny said. “Once the crisis was over, what we decided to do was everything over an hour had to be in person with discretion on the part of the judge to grant a dispensation from that.”

Small one-issue, procedural issues are done virtually, as well as matters where lawyers have to come in from across Canada, which is very expensive. However, he added, “when you’re dealing with big problems, it’s easier to have a debate and a discussion with everyone if you’re all in the same room,” Penny said. “I think that was a good balance, a good compromise.”

In Alberta, virtual hearings are now the default unless parties consent or the judge directs otherwise, Romaine said. “I find virtual hearings to be very useful and a good thing for routine matters. Anything that could be done in a half hour or an hour, it used to be the parties would have to troop into court with the monitor. There’s no reason for that.”

Virtual hearings are unsatisfactory for contested cases lasting a half day or longer, she said, noting her view is not a consensus opinion. “Anything involving a witness is better in court. The formalities of the court process, and I’ve seen it many, many times, impress on parties that this is a serious matter. They will be sworn to tell the truth in front of an audience of counsel and the judge. In addition, when the parties are together in court, the chances of productive settlement discussions seem to be higher.”