Questionnaire
J. Sarra, R. Davis - responses September 22, 2002
CANADA
Parts 1-6
1.
Background Information
A) Briefly provide an overview of your country’s economic environment,
in particular the relevance and significance of any political, social or
cultural influences.
Canada is a market economy with a very developed corporate law, securities
law, and credit enforcement regime. Our system is drawn from a combination
of the U.K. and the United States. It is a federal system, with insolvency and
bankruptcy falling under federal jurisdiction and corporate and securities law
under both federal and provincial jurisdictions. Personal property protection is
provincial, whereas banking is federally regulated. There are active securities
markets, although 90% of public trading is done on the Toronto Stock Exchange
(TSX).
B) Is there systemic insolvency of the banking and/or corporate sectors?
There have been growing corporate insolvencies, particularly in the past 15
years. Banking failures are rare, but do occasionally occur.
C) Is there ongoing or recent law reform activity in the areas of
commercial and insolvency law? If so, please describe.
The last amendments to the Bankruptcy and Insolvency Act (BIA) and the
Companies' Creditors Arrangement Act (CCAA) were made in 1997. The
legislation called for a five-year review and Parliament is now engaged in this
process, which will continue into 2003. Legislative reform is expected in 2003
in respect of commercial insolvency and bankruptcy.
D) Is the judiciary effective? Respected by insolvency practitioners?
Generally, the Canadian judiciary is considered very effective in insolvency
cases and is generally respected by insolvency practitioners. Two courts,
Ontario, Quebec, have created specialized parts of the court, while others,
British Columbia and Alberta have generated a group of judges with specialized
skills in commercial insolvency.
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2.
Structure of Business Organizations
A) What are the main forms of business organizations in your country?
Corporations are the major form of organization, although partnerships in some
sectors still dominate. While there are many publicly traded corporations, unlike
the United States, the majority are closely held even though they are publicly
traded.
B) What is the usual size of business organizations?
We have all sizes, from multinationals working in 63 countries to local
businesses. There is no "usual" size, although many have a capitalization of
under $100 million.
C) Briefly describe the usual forms of management and ownership of these
organizations (e.g., public v. private ownership, extent of family control,
etc.)
There are both privately held corporations, usually traditionally family held and
publicly traded corporations. About 65% of publicly traded corporations are
closely held, primarily by families or single (or a small group) of controlling
shareholders.
Both public and private corporations have some degree of separation between
directors and officers, although only about one third of Canadian publicly traded
corporations have a majority of independent directors on their corporate board.
D) Comment briefly on the accounting standards adopted by these
organizations and whether independent, outside accountants are
employed.
Corporate and securities laws require use of an independent auditor. The
auditor is required to file annual reports to shareholders and periodic reports to
directors. The shareholders elect the auditor, which is an external accounting
firm. Ostensibly, the auditors are accountable to the board of directors, although
in practice much of their dealings are with corporate officers. The auditors are to
provide an independent assessment of whether the company is following
Canadian GAAP.
E) Are there any statutory or regulatory bodies that monitor or supervise
these organizations?
The accounting industry is almost exclusively self-regulated as a profession,
primarily by the Canadian Institute of Chartered Accountants, and for insolvency
accountants/trustees by the Canadian Association of Insolvency and
Restructuring Professionals. Securities regulators do work with these
organizations to set accounting standards.
F) Overall, is there a strong ethos of corporate governance and disclosure?
There has been a great deal of attention on corporate governance and best
practices, through reports commissioned by the TSX. However, these are all
voluntary guidelines with no mandatory standards.
Canada does, however, have a continuous disclosure regime under securities
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legislation.
3.
Nature of Financing for Business Organizations
A) What are the main sources of financing for these organizations?
Financing is a mix of debt and equity, and some instruments that have elements
of both. Larger corporations raise capital in domestic and international capital
markets. Venture capital funds are one of the largest sources of financing,
particularly for expansion of existing companies.
B) What are the common types of financing (e.g., debt v equity)?
Most corporations engage in a mix of debt and equity financing, or instruments
that contain elements of both.
C) In relation to each type of financing, briefly describe in particular:
i) the duration;
ii) the usual parties;
iii) the types of expenditure usually funded by such financing; and
iv) Whether there is a developed legal regime governing such types of
financing.
DEBT
Almost all companies have operating lines of credit. These tend to be ongoing,
or renewable on a specified periodic basis.
Most major assets are secured, and there is a well-developed scheme of
enforcement of secured claims.
Bank financing is very common and is covered under both the Bank Act and
provincial property security regimes, as well as some protections under the BIA.
There is also a growing practice of secondary debt trading, which can influence
the corporation's ability to raise further capital.
EQUITY
Privately held companies can determine their own share structure, the
mechanism for further allocations in terms of raising equity capital. Existing
shareholders are protected through voting rights under corporations' statutes
and minority shareholder remedies. Additional equity or debt can be raised
periodically, depending on capital needs.
Public offerings are regulated by securities legislation, which creates a set of
standards that enable liquid capital markets, but enshrine a "consumer investor"
protection regime.
The legal regime in respect of both equity and debt is highly regulated, with clear
statutory rights and remedies.
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D) Briefly describe bank lending practices (eg, cash flow v asset lending).
E) Briefly describe bank monitoring procedures.
F) Which is the most commonly employed type of financing, and why?
Banks engage in granting operating lines of credit and similar credit facilities, as
well as asset-based loans, secured through debentures and other secured
instruments. There is a healthy mix between these types of financing. If the
company is a start up, the bank usually secures personal guarantees from
individuals as further security. General Security Agreements are the most
common form of global security over the assets and operating funds. All of
these tools generally impose monitoring conditions, including access to
documents, periodic or continual reporting and particular restrictions or
covenants on use of funds or further acquisition of debt without bank approval.
All tend to include self-enforcement remedies in the credit document in the event
of default or other specified transactions.
4.
Secured Creditors
A) Briefly describe the usual forms of security.
Personal Property Security
Bank Security
Personal Guarantees
B) Which is the most commonly employed type of security, and why?
Personal Property Security
Bank Security
C) Is there a system of registration for any types of security?
Yes, for banks there is a secured transaction regime under the Bank Act as well
as registering bank claims under provincial Personal Property Security statutes.
Personal Property Security Regime (provincial legislation)
D) How are the priorities regulated between competing types of security?
Under Personal Property Security statutes, perfection and order of registration
are key to having a priority.
There is also a hierarchy of credit enforcement under the BIA, once a
corporation enters bankruptcy proceedings.
Canada is a federal system, so where there is an operational conflict in the
security, the federal legislation "trumps", i.e. banking and bankruptcy over
provincial liens or personal property security.
E) Briefly describe the available options open to a security holder to
enforce its security interest.
Repossession
Appointment of Receiver and sale
Petition into bankruptcy
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Execution creditors, with a money judgment, can enforce by obtaining a writ of
seizure and sale.
F) Can security holders self-enforce their interests?
Yes, rights of possession, writs of seizure and sale (execution) and/or rights to
appoint a receiver to deal with assets in a commercially reasonable manner in
order to realize on the claim
G) Does the legal system provide an effective means for the enforcement of
secured rights by security holders and also provide adequate protection
of their rights?
Generally, it works very well and protects secured interests. There is also
expeditious access to the court where a dispute arises in the context of security
enforcement or priority among competing claims.
H) Overall, is it more common for secured creditors to enforce their rights
against the security when the corporate debtor is in financial difficulty
or to attempt to negotiate a suitable arrangement?
It is a mix, although generally a workout is the first initiative. The exception
would be where there has been a bad history between the parties.
5.
Unsecured Creditors
A) Briefly describe the options available to an unsecured creditor to collect
debts owed.
There are provincial lien statutes for particular creditors, primarily trade creditors,
which create a priority lien.
Employment standards legislation creates some priorities for wages and some
benefits.
Pension laws create statutory trusts in favour of pension beneficiaries.
Municipal taxes have a statutory lien on real property.
Some crown claims such as employment insurance remittances and goods and
services tax are given priority (deemed security interest).
Landlords rights of distress - seizure and sale of assets to realize on arrears
claims
However, unsecured creditors are frequently unprotected. Many of these rights
are lost once a corporation becomes bankrupt.
B) May unsecured creditors pursue self-enforcement?
Some provincial lien statutes allow the creditor to retain the good until the claim
is paid.
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The Crown can, on notice, remove payment from current accounts in the case of
some priority statutory claims for taxes.
Generally, there are very few self-help remedies for unsecured creditors. In
bankruptcy, there is a 30 day window to repossess goods under the BIA, but
these are viewed as generally ineffective, given the stringent conditions that
attach.
C) Does the legal system provide an effective means for the collection of
debts by unsecured creditors and also provide adequate protection of
their rights?
Unsecured creditors generally tend to be among the most vulnerable groups in
terms of enforcement of claims. Often they are unaware of their rights, suffer
information asymmetries or do not have the resources to enforce claims.
Some statutory claims are enforced through administrative tribunals, e.g.
employment standards, where the agency carries the case and thus there is a
greater likelihood of success in enforcement of the claims. Otherwise, litigation
can be prohibitively expensive.
More recent, during CCAA proceedings, the court is granting a post-petition
trade creditor priority charges, in order to ensure continued delivery of goods
and services and protect trade creditors.
D) Overall, is it more common for unsecured creditors to pursue legal
remedies when the corporate debtor is in financial difficulty or to
negotiate a suitable arrangement?
Unsecured creditors are more likely to be willing to negotiate an arrangement, in
part for the reasons given in the prior response, and in part because as the
lowest ranking creditors, they often receive nothing (or a few cents on the dollar)
in a liquidation outcome.
6.
Overall Insolvency Law Regime
A) What are the principal laws governing insolvency in your country?
Bankruptcy and Insolvency Act (BIA)
Winding Up and Restructuring Act (banks and financial institutions)
Companies' Creditors Arrangement Act (CCAA)
i) Are there separate insolvency laws for individuals and corporate
enterprises?
Are there separate laws for liquidation and
reorganization?
The BIA applies to both personal and commercial bankruptcy, although
separate parts apply.
The BIA contains workout provisions for both personal and commercial.
It also governs liquidation.
The CCAA is a statute aimed solely at commercial restructuring and
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arrangements, for corporations with greater than $5 million in debt.
ii) Is the insolvency law a separate piece of legislation, or is it part of
the general company law?
Separate from company law
iii) Is there separate insolvency legislation for regulated industries such
as banks, investment banks, insurance companies, etc?
Yes, the Winding Up and Restructuring Act
B) Briefly summarize recent insolvency statistics for your country.
There are no statistics under the CCAA.
Under the BIA, statistics (for 2001):
Total annual business bankruptcies: 10, 045
Total consumer bankruptcies: 79,453 (including personal and sole proprietors)
Source: federal Office of the Superintendent of Bankruptcy (accessed
September 23, 2002)
C) Which courts are competent to exercise jurisdiction in insolvency
matters? Is there any specialized court to hear insolvency matters?
Bankruptcy is generally heard in the provincial superior courts of each province.
Ontario has a "commercial list" in which a group of judges have a special
interest and expertise in commercial insolvency. Quebec has just formed a
separate list.
Many provinces have separate bankruptcy judges for personal bankruptcy.
D) Is there a sufficient pool of professionals competent and experienced in
handling insolvency matters?
Yes, there are several hundred highly qualified lawyers; about 800 trustees
licensed in Canada (both personal and commercial bankruptcy). Many of
these are accountants, who also act as Monitors under the CCAA and receivers
in the enforcement of secured claims. Chief restructuring officers and other
turnaround professionals are also increasingly being used.
E) Please advise on the identity of the relevant government authority and
their role in the insolvency process.
The principal regulator is the federal Superintendent of Bankruptcy, that
engages in policy development, issues rules and regulations under the statute,
records statistics, sets standards for trustee licensing, regulates activity under
the BIA, and advises the Parliament on legislative change.
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