Populism and Politics in Insolvency Legislation
By Stephanie Wanke, Sr. Specialist Legal Editor, Thomson Reuters - Practical Law Canada, Insolvency and Restructuring
Insolvencies are financial tornadoes, harming not just the debtor, but also employees, customers, suppliers, lenders, investors, shareholders and, often, the community at large. Canada's insolvency regimes have been crafted to mitigate this collective harm by facilitating restructuring where possible, maximizing value, and providing for the fair and orderly distribution of assets. Mitigation, however, is not elimination, and insolvencies undeniably harm innocent stakeholders.
One private member's bill has recently been passed and two other non-governmental bills have been introduced with the aim of shielding specific stakeholders (pensioners, post-secondary students/employees and fruit and vegetable farmers) from collateral damage in insolvency proceedings.
Insolvency legislative amendment by piecemeal non-governmental bills is an unfortunate trend.
Dr. Virginia Torrie, Estey Chair in Business Law at the University of Saskatchewan, notes that this trend highlights "a real lack of parliamentary leadership on bankruptcy reform" which is "nothing new" as "Parliament has been a reluctant lawmaker since Confederation when it comes to bankruptcy reform".
The last statutorily mandated review of Canada's two main insolvency Acts, the Bankruptcy and Insolvency Act (the "BIA") and the Companies' Creditors Arrangement Act (the "CCAA"), took place in 2014, five years after the material amendments came into force in 2009. Although the review took place, and certain standalone amendments have been made to the BIA and the CCAA since 2014, no comprehensive reform has occurred, and no new review date has been inserted in the BIA or the CCAA.
Pension Protection Act
Starting as a private member's bill, the Pension Protection Act, S.C. 2023, c. 6 ("PPA") became law on April 27, 2023. The PPA dramatically expanded on existing pension priorities and created new super-priorities for outstanding special payments, unfunded liabilities, and solvency deficiencies in regulated defined benefit pension plans in proposal proceedings, bankruptcies, receiverships, and restructurings under the CCAA.
Bill S-215: Post-Secondary Institutions
Bill S-215, the Post-Secondary Institutions Bankruptcy Protection Act (the "PSI Bill"), would exclude post-secondary educational institutions that receive government funds ("PSIs") from accessing the BIA or the CCAA as debtors. In addition, the government must designate a Minister to develop a proposal, in consultation with the provinces and stakeholders, to reduce the likelihood of PSI insolvency, protect students, employees and support affected communities.
The PSI Bill passed second reading in the Senate on May 17, 2022 and is currently being considered in committee.
Bill C-280: Perishable Fruits and Vegetables
Bill C-280, the Financial Protection for Fresh Fruit and Vegetable Farmers Act (the "Produce Bill"), would deem perishable fruits and vegetables and their proceeds of sale to be held in trust for the benefit of the supplier provided the supplier has: included prescribed terms in their invoice or otherwise given notice; the payment terms are 30 days or less; and the purchaser, trustee or receiver has not paid the entire balance when due.
The Produce Bill passed second reading in the House of Commons on May 17, 2023 and is currently being considered in committee in the House of Commons.
While each bill carries its own unique set of benefits and drawbacks, shared issues arise:
A system out of balance. Each of these bills was drafted from the perspective of a singular stakeholder or issue, overlooking that insolvency law is an integrated system fundamentally tasked with reconciling various interests on a principled basis. As Jean-Daniel Breton, CPA, FCIRP, LIT, Senior Vice-President at Ernst & Young Inc. and outgoing Chair of the Canadian Association of Insolvency and Restructuring Professionals notes, "distribution of proceeds of liquidation in an insolvency context is a zero-sum game, and if one creditor group is granted a priority status, it is necessarily at the expense of another creditor group." Mr. Breton cautions that modifying insolvency law through single issue amendments can lead to flawed bills as a result of "the natural tendency to focus on the objectives of the amendment, without taking into consideration the more global objectives of the legislation."
The Produce Bill, for example, fairly egregiously violates the pari passu principle by favouring a specific type of supplier at the expense of creditors as a whole without a principled basis. Is a multinational fruit grower more deserving of protection than a small local supplier of baked goods? As Denis Ferland, Partner at Davies Ward Phillips & Vineberg and President of the Insolvency Institute of Canada, speaking in his personal capacity underlines, insolvencies "can't be ruled by exception".
Ineffective "solutions". Despite well-meaning intentions, it is questionable if any of this legislation will effectively address the purported problems. The teeth of the bills are in the insolvency provisions, but by the time an entity is insolvent, there is no guarantee of value to distribute to any creditor, regardless of priority.
As CAIRP specifically pointed out in its December 2022 submission to the Senate on Bill C-228, the benefit to pensioners of the PPA may be illusory given the limited value of a debtor's assets on liquidation. Lender response to the PPA may also mean a contraction of credit for companies with existing defined benefit pension plans, which could, perversely, trigger insolvencies. Mr. Breton cautions that the PPA may contribute to employers converting defined benefit plans into defined contribution plans, to the detriment of the employees the PPA is designed to protect.
The PSI Bill not only doesn't solve PSI insolvency, it creates new problems. As Emmanuel Phaneuf, CIRP, LIT and Partner at Raymond Chabot Grant Thornton who testified before the Standing Senate Committee on Banking, Commerce and the Economy, points out, it simply isn't workable to exclude PSIs from the existing insolvency regime without providing a replacement regime. CAIRP, in its written submission to the government in the consultations following the introduction of the PSI Bill similarly notes that alternatives to an insolvency regime for PSIs are either undesirable, such as a race by creditors to enforce, or unworkable, such as a level of government backstopping all PSI debt.
Systemic Consequences. An effective insolvency regime prioritizes restructuring over liquidation, maximizes asset value for all stakeholders, and is fair, orderly, efficient and predictable. Each of these bills potentially increases the complexity and cost of borrowing money, operating a business, administering an insolvency proceeding, while reducing the prospect of successful restructurings for certain types of businesses.
Mr. Ferland notes that the PPA makes successfully restructuring any distressed debtor with a defined benefit pension plan difficult, contributing to liquidation over restructuring, harming employees in the process. Mr. Ferland points out that the quantum of the priority solvency deficiency is unknowable in advance and continues to fluctuate as the underlying value of the plan assets experience market changes. Without a crystallized priority amount, accessing interim financing or finding a purchaser of the business is challenging.
Each new priority created in insolvency law is reflected in future lender due diligence, the cost and availability of capital and ongoing borrower reporting obligations. Uncertainty in the interpretation of new legislation leads to litigation and additional priorities increase the cost of insolvency administration.
Poor drafting. Non-governmental bills do not receive the same drafting support, debate time or advance expert input. Broad stakeholder consultation is often rushed or limited and occurs after the initial language of the bill has been proposed. The result is that drafting issues with these bills are apparent.
The ambiguities of the PSI bill, for example, have been the focus of much of the debate in Committee on this bill, not the broader issue of the treatment of PSIs in insolvency.
The Produce Bill is mechanically flawed in a number of ways, including an uncertain definition of perishable fruits and vegetables, a lack of transitional provisions and, most significantly, a confusing and unusual use of a deemed trust. For example, the Bill provides that the laws of general application in relation to trusts and trustees in force in the respective province apply and prevail over the deemed trust. The effect of that provision is unclear, particularly in Quebec which has strict requirements regarding trusts. The deemed trust also intersects awkwardly with existing priorities and will certainly lead to litigation.
A Better Way Forward
Insolvency law is critically important. Too important to leave to piecemeal politicized amendment, no matter how well-intentioned.
With each new non-governmental bill gaining traction, the focus of insolvency legislative activity shifted accordingly, without an impartial analysis of whether or not these were the most pressing areas in need of reform. Dr. Torrie underscores that "a balancing of interests" is central to insolvency. Comprehensive stakeholder interests should be considered, balanced and prioritized before proposed amendments are drafted instead of being left to rushed consultation after legislation has been drafted in favour of a single constituency's concern.
Legislative reform should be done holistically, with a view to balancing interests and creating a fair and efficient insolvency regime.
Notwithstanding the drawbacks set out above, Dr. Torrie notes that, in absence of government-led reform, these bills have been important in sparking debate. The PSI bill, for example, is leading to federal government consultation with provinces and consideration as to what an alternative insolvency regime for PSIs could look like, which Dr. Torrie sees as a positive. Similarly , both Mr. Phaneuf and Mr. Ferland believe that insolvency law can evolve through the courts, not just the legislature. Mr. Ferland points to the inherent flexibility of the CCAA being used to craft discretionary orders on interim financing and vesting, which, after being tested in practice, were later codified in legislative amendments. Mr. Phaneuf explains that, when faced with the outdated Winding Up and Restructuring Act in the Union of Canada Life Insurance liquidation, the court, as a practical matter, was amenable to incorporating modern CCAA practices in that proceeding.
Disclaimer: The views and opinions expressed in this article are those of the author and, where stated, the interviewees, and do not necessarily reflect the policy or position of any other agency, organization, employer or company. The author thanks each of Dr. Torrie, Mr. Breton, Mr. Ferland and Mr. Phaneuf for taking the time to discuss with her. Any errors or shortcomings of this article remain with the author.