Insolvency Reforms Offer New Solutions to Financial Difficulties
Christopher Porter for The Lawyers Weekly
November 20, 2009
Amendments to bankruptcy legislation offer new solutions to financial difficulties
The federal government's long-awaited insolvency reform package, which finally came into force on Sept. 18, 2009 is already changing the insolvency landscape. While it's still early, these reforms should prove helpful for individuals and businesses experiencing serious financial challenges.
On the consumer side, while it is too soon for statistics, bankruptcy trustees report a dramatic rise in consumer proposal filings since the final portions of Bill C-55 became law.
A few key amendments likely account for much of this increase. Amendments to the Bankruptcy and Insolvency Act (BIA) over the past two decades have tended to prod individuals and businesses toward proposals rather than bankruptcy. The latest amendments continue this trend.
The most important change is an increase in the non-mortgage debt limit to $250,000 from $75,000 for filing a consumer proposal. A consumer proposal is a simpler and faster process than the more complex Division 1 proposal. A typical consumer proposal involves payments to the trustee for the benefit of creditors of a fixed amount, usually in monthly installments.
Other amendments make bankruptcy less appealing. First-time bankrupts who do not have surplus income (which is a defined calculation) and who fulfill all of their obligations will continue, as before, to be eligible for automatic discharge from bankruptcy after nine months. However, those having surplus income must now make payments to the trustee for 21 months.
For second-timers, the incentive to make a proposal is even stronger. Second-time bankrupts with no surplus income are eligible for automatic discharge after 24 months. Those with surplus income are required to make payments to the trustee for 36 months.
A further measure is targeted at individuals who have not paid their taxes - those whose personal income tax debt is over $200,000 and comprises more than 75 percent of their unsecured debt. Even after following the new extended surplus income payment timetable, these individuals will only be able to obtain their discharge from bankruptcy by applying to the court. It is expected that the court will set conditions, such as additional payments, for discharge.
When it comes to businesses, the new amendments harmonize procedures under the BIA and the Companies Creditors Arrangement Act (CCAA) and create more flexible rules for proposals, thus providing smaller businesses with better access to cost-effective restructuring opportunities. A BIA Division 1 proposal has been enhanced as a restructuring vehicle, which may be of particular interest to smaller companies in financial distress.
Since company restructurings can be a lengthy process, it will be a while before the effects of the amendments in the business sector become apparent. Trustees anticipate, however, that restructurings will become more common among small and mid-size businesses.
Changes to receivership rules are also likely to result in more receiverships. Since 2006, when TCT Logistics Inc. decided that the BIA does not protect receivers from liability as successor employers, there have been few, if any, operating receiverships.
The latest amendments, however, stipulate that a court-appointed trustee, interim receiver, receiver or monitor carrying on a debtor's business will not be exposed to personal liability as a successor employer. While secured lenders have supported proposals, liquidating CCAA and interim receiverships where they thought there was going-concern value, now it is anticipated they will be more willing to appoint receivers of operating businesses.
While enterprises struggling financially now have greater restructuring options, every business that relies on lenders for financing should carefully monitor its liabilities. Insolvency amendments designed to protect the rights of certain creditors may impact the value of lenders' security. The Wage Earner Protection Program (WEPP), which came into force in July 2008, is one example.
The WEPP protects unpaid wages, commissions, vacation and termination pay - up to $3,253 - of every employee in a company in the six months prior to its bankruptcy or receivership. These payments have super-priority rights over the claims of secured creditors.
As well, simplified "30-day goods" rules that came into effect offers unpaid suppliers a greater likelihood of recovering goods in a bankruptcy or receivership. The downside: lenders providing loans secured with inventory that may be subject to supplier claims are likely to lend less.
Recent headlines about under-funded pensions and possible priorities for pensioners are also likely to be of concern to lenders since in a CCAA plan or a Division 1 proposal arrangements must be made to remit unpaid pension contributions.
In order to limit their exposure, some lenders are intensifying monitoring of loan agreements. Others are adjusting terms, increasing the margins on loans and lines of credit, or demanding additional security or covenants. Thus, business leaders will now have to be more vigilant regarding their lending agreements by monitoring cash flow, borrowing requirements and loan margins. As well, to protect directors from liability, they should remit source deductions and pay wages and pension contributions on a timely basis and regularly update vacation accruals.
By early 2010, the statistics will tell us more about the quantitative effects of the amendments. We already know, however, that both individuals and businesses now have more opportunities than ever before to solve their financial difficulties without resorting to bankruptcy.
Christopher Porter is a vice-president of BDO Dunwoody Limited.