An Overview of “Reinventing Bankruptcy Law”: A History of the Companies’ Creditors Arrangement Act
The Companies’ Creditors Arrangement Act (CCAA) has been on Canada’s statute books for almost 90 years. In the last four decades the Act has been used to resolve the insolvencies of numerous large firms, including household names such as Air Canada, Algoma Steel, Eaton’s, Sears Canada, Target Canada, Canwest Global Communications, and DavidsTea, to name a few. In that same timeframe insolvency practice has developed into a robust field, leading to the establishment of publications like the Annual Review of Insolvency Law and its marquee conference. Yet, until recently, there has been little enquiry into the CCAA’s history. Thus, my monograph, Reinventing Bankruptcy Law: A History of the Companies’ Creditors Arrangement Act, published by University of Toronto Press in 2020, offers the first historical account of the origins and development of Canada’s premier corporate restructuring regime.
Reinventing Bankruptcy Law uses several lenses of analysis including law, history, political science, and sociology, to provide a multi-dimensional narrative of legal change in Canadian corporate restructuring law over the twentieth-century. The book addresses the question of, “What makes the CCAA, ‘the CCAA’?” The answer is, admittedly, not for the faint hearted. As Professor Anthony Duggan (University of Toronto, Faculty of Law), writes in his foreword, “the book explodes the conventional wisdom surrounding the CCAA’s underlying policy objectives, and it exposes the historical errors in the more recent case law to devastating effect.” This article highlights three of the book’s key findings.
The first key finding is that the CCAA was intended to be a remedy for large, secured creditors. Aside from a sole remark in Parliament, there is no historical support for the idea that the Act was meant to be a remedy for debtor firms or intended to advance the broader public interest. Rather, firms with significant public interest in the 1930s, such as railroads and telegraph companies, were expressly excluded by the CCAA’s scope, and still are, at least notionally. It must be remembered that the Great Depression was a nadir in public faith in both capitalism and free markets. Firms with significant public interest aspects tended to receive direct aid from government, and in any case the fate of significant firms was not left in the hands of creditors.
The Act itself was a continuation of a longstanding practice of receivership restructuring led by bondholders and completed, in many cases, by way of a judicial sale. While the enactment of the statute was coincident with the Great Depression, it was not prompted by that significant economic episode. Rather, changes in financing practices in the 1910s and 1920s, and increased US investment had left Canadian companies without a crucial term in their trust deeds (called a “majority provision”) which facilitated bondholder-led restructurings through a trustee or receiver. Without majority provisions, large companies could not be restructured because Canadian bankruptcy legislation did not provide for the restructuring of secured claims. While bondholders could place debtor firms in receivership, receivership without majority provisions functioned as little more than a holding pattern. Finding a way to restructure secured claims – outside of private agreements – was of the utmost importance because the largest holders of Canadian corporate bonds were large life insurance companies, such as Canada Life, Great-West Life and Sun Life. The solvency of these systemically important Canadian financial institutions depended on finding a way to restructure corporate borrowers.
The second key finding of the book is the significant controversy that surrounded the CCAA’s enactment and existence as a piece of federal legislation. The 1930s view of the Division of Legislative Powers contained in the Constitution Act, 1867 held that the secured claims, as a form of property right, fell within the exclusive jurisdiction of the provinces, and no subsequent event, such as insolvency, changed that. To commercial lawyers, the CCAA appeared unconstitutional on its face and they initially cautioned clients against its use. This led Prime Minister Bennett’s government to refer its own statute to the Supreme Court of Canada for a ruling on its constitutional validity. To the surprise of many, the Supreme Court upheld the CCAA as a valid federal bankruptcy and insolvency statute, but, curiously, the Majority judgment neglected the question of property rights and instead characterized the CCAA as a means of compromising with “unsecured creditors.”
The confusion evident in the Supreme Court’s decision was present among companies and trade creditor groups as well. While the CCAA was intended only to be a remedy for bondholders, nothing in the skeletal Act prevented a debtor company from making a filing and attempting a restructuring. However, in the absence of a trustee or receiver acting for bondholders, there was no mechanism for supervising the debtor’s restructuring efforts and there was a general feeling that this led to abuses of junior and trade creditors. Such concerns led to repeated efforts to repeal the CCAA, starting in 1938. A Parliamentary Committee recommended a compromise reached by groups representing the interests of trade- and finance-creditors to preserve the CCAA as a bondholder remedy and prevent its use as a debtor-in-possession (DIP) remedy. In the 1950s Parliament duly enacted the trust deed amendment. This amendment precluded use of the Act unless the company had an outstanding issue of bonds or debentures running in favour of a trustee, and the proposed restructuring included this indebtedness. The point of the amendment was that the Act could only be used when the bondholders’ trustee or receiver was present to supervise restructuring efforts and ensure such efforts were directed to the benefit of creditors.
The foregoing overview of the CCAA’s origins and early history leads to the third key finding of Reinventing Bankruptcy Law, which is that an historical analysis casts more recent developments in a somewhat different hue. A contemporary view of CCAA law over the last 40 years is generally laudatory of the progressive role played by judges and counsel in fleshing out an anemic Act into a modern, DIP restructuring regime, which includes concern for public interest considerations that arise in corporate insolvency. When these changes are assessed in light of the actual purpose of the Act and that of the trust deed amendment, the picture is somewhat less flattering.
Consider just one example – the tactical device known as an “instant” trust deed. This invention emerged shortly after the re-discovery of the CCAA in the 1980s and 1990s, and its sole purpose was to bring a debtor company within the ambit of the Act. It basically worked as follows: The debtor company, which did not otherwise have an outstanding issue of bonds and which was insolvent, borrowed a nominal amount from a non-commercial creditor (often a member of its management team), through a trust deed so as to satisfy the trust deed requirement contained in the CCAA. This practice plainly undermined Parliamentary intention that the CCAA be a remedy for secured creditors, both as expressed through the original enactment of the Act and the later trust deed amendment. The use of tactical devices has since set a trend in CCAA law whereby restrictive provisions are interpreted so narrowly as to be rendered meaningless in practice, which is difficult to square with established rules of statutory interpretation. While many case-based CCAA law developments have been justified, to a greater or lesser extent, based on the skeletal nature of the Act, such statutory restrictions are, by their very nature, not “gaps” in need of filling.
A related theme in recent CCAA law is the role reversal between Parliament and the courts in terms of driving legal change. Instant trust deeds also provide a good example of this phenomenon. After instant trust deeds had become standard practice in CCAA courts, Parliament repealed the redundant provision. Thus, legal change that originated in the courts was later memorialized by Parliament into statutory form. This is unusual in a statute-based area of law, where one ordinarily expects change to come through legislation and, in any case, does not expect judges to effectively “repeal” sections of the governing Act. These observations all accord with the large role played by judges in contemporary CCAA insolvencies.
This article has highlighted three of the key findings from an historical study of the CCAA, and illustrated how they provide a new perspective on contemporary legal changes. These themes, and the disjuncture between history and contemporary practice, are the subjects of analysis in the latter half of Reinventing Bankruptcy Law which will, no doubt, give readers much to consider about contemporary CCAA law and practice.