Canada: Restructuring & Insolvency (3rd edition)

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This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in Canada.

This Q&A is part of the global guide to Restructuring & Insolvency (3rd edition). For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Since the scope of immovable property is a matter of provincial law, reference should be made to the applicable provincial laws in the jurisdiction where the property is situated and, in particular, if the property is situated in the Province of Québec. Generally, real estate is classified as immovable property, while fixtures attached to real property may or may not be considered immovable property.

    Common Law Jurisdictions: Available Forms of Security and Required Formalities

    Immovable/Real Property

    In Canadian common law jurisdictions (all provinces except Québec), security over immovable property can be granted by way of a:

    i) Mortgage. This is generally used where there is a single piece of real property that is financed by a single lender.

    ii) Debenture. This is commonly used in commercial lending transactions to cover multiple pieces of real property, as well as movable property. Like a mortgage, there is often only one lender.

    iii) Trust deed. This is commonly used in sophisticated bond financings and syndicated loan transactions where many lenders are involved.

    In addition to the above, in very rare circumstances a person without a registered mortgage may be able to assert an equitable mortgage or interest in immovable property. This can occur where the original mortgage documentation is defective in some way and the court is asked to deem the mortgage as an equitable mortgage.

    A security interest granted over immovable property must be in writing and registered against title to real property to be enforceable. Each Canadian province has its own real property legislation and registry system governing the validity and enforceability of mortgages registered in its jurisdiction. Registration of a charge in the applicable real property registry system constitutes notice of a security interest.

    Movable/Personal Property

    In Canadian common law jurisdictions (all provinces except Québec), creditors can take security over movable property pursuant to a properly executed and registered security agreement. Types of security agreements include:

    i) General security agreements: whereby the debtor grants the secured party a security interest over all of the debtor's present and after-acquired personal property; or

    ii) Chattel mortgages or equipment leases: using this method, the debtor grants a security interest over specific assets.

    The most typical form of security over personal property is a general security agreement which is given legal effect by execution by the parties. Each provincial statute has rules governing how a security interest may attach to personal property. Perfection of a personal property security interest is governed by provincial statutes but typically takes the form of registration or possession.

    For movable property, most Canadian provinces have adopted a personal property security act (“PPSA”), which is loosely modelled on Article 9 of the Uniform Commercial Code and which is structured to apply to every transaction which creates (in substance) a security interest in personal property without regard to the particular type of security involved.

    To be enforceable against third parties, a security interest in the debtor's personal property must be both attached and perfected.

    Attachment of a security interest occurs when all of the following are performed:

    i) value is given;

    ii) the debtor has acquired rights in the secured asset over which the security is being granted;

    iii) a written security agreement is signed by the debtor; and

    iv) the written security agreement provides a clear description of the secured asset over which the security interest has been granted.

    Perfection of a security interest can be achieved through:

    i) Registration under the PPSA in the applicable electronic registration system; or

    ii) Possession by the secured party, if the secured asset is any of the following: (a) chattel paper; (b) tangible goods; (c) instruments; or, (d) negotiable documents of title.

    Investment property can be perfected by control. Control is obtained when a secured party can sell the property without any further action by the debtor. Depending on the type of investment property, this can be achieved by either becoming the entitlement holder, or entering into a control agreement.

    Investment property includes certificated or uncertificated securities, a security entitlement, securities accounts, future contracts and future accounts.

    Québec: Available Forms of Security and Required Formalities

    Under Québec private law, it is said that all property of a debtor, whether moveable or immoveable, tangible or not, present or future, is the “common pledge of its creditors”. This means that, in principle, creditors may institute judicial proceedings to cause the property of their debtor to be seized and sold to the extent required to satisfy their claims. The two main exceptions to this principle are (i) property exempt from seizure, either by contract or by statutory effect, and (ii) the existence of “legal causes of preference”. “Legal causes of preference” are prior claims and hypothecs, and they are the main forms of security which may attach to both immovable and movable property in Québec.

    Prior claims and hypothecs are, in general terms, the Québec equivalent of “liens”. Some prior claims and all hypothecs are “real rights” in that they attach to property regardless of who holds it, whether it be the debtor or otherwise. A phrase often said is that they “confer on the creditor the right to follow the property into whatever hands it may come”, as long as the obligation whose performance they secure subsists.

    Prior Claims

    Prior claims are certain claims for satisfaction of which a creditor is preferred over all others, even the hypothecary creditors (discussed below). Under Québec private law, prior claims are the highest ranking claims, regardless of the moment at which they are created.

    Prior claims exist by the effect of the law alone. One cannot contract into, or out of, prior claims, except, in that latter case, with the consent of the holder of the prior claim, which of course is rarely obtained without satisfaction of the entire claim.

    Unlike hypothecs (with the exception of the “construction hypothec”, discussed hereafter), prior claims may exist even without being published in a public registry. This is why they are often called “occult security”, and why their existence sometimes poses great legal risks and is the subject of important legal opinions.

    Among all prior claims, Government claims for amounts due under fiscal and taxation laws are those that are the most susceptible to attach to one’s property.


    The term “hypothec” is, outside of Europe, almost exclusively used in Québec. It encompasses the common law equivalents of, inter alia, mortgages, non-possessory liens over movables or immovables, and legal or equitable charges.

    In Québec private law, hypothecary claims rank senior to unsecured claims but junior to prior claims. Between themselves, in principle, hypothecary creditors rank according to the date of publication of their hypothec: the older the publication, the higher the rank. One major exception to this principle is the “construction hypothec”, as will be discussed below.

    Hypothecs may be “legal” or “conventional”, depending on whether they are created (i) by the effect of the law alone (“legal”), for example, a construction hypothec, a legal hypothec of the State for sums due under fiscal and tax laws, a legal hypothec for the holder of a claim resulting from a judgment, etc., or (ii) by contract (“conventional”).

    Conventional hypothecs vary depending of the property on which they attach. The most common types of conventional hypothecs are immoveable hypothecs, hypothecs on movable tangible property (with or without delivery), hypothecs on claims, hypothecs on securities, and floating hypothecs. Some may only be granted by businesses and all must comply with their own specific requirements; for example, an immoveable hypothec is not valid if it is not granted by notarial act en minute. However, all conventional hypothecs must satisfy the following conditions in order to be valid and enforceable: (i) the grantor (which could be the debtor or a third-party) must be able to validly alienate the hypothecated property (e.g. has valid title and may validly consent to its alienation); (ii) the contract must be in writing and expressly state the maximum amount of the hypothec, regardless of whether or not the secured obligation’s amount may be precisely determined; and (iii) the hypothec must be published in the appropriate public registry.

    Effects of Non-Compliance

    In all Canadian jurisdictions, if the required registration requirements are not complied with, the creditor’s security interest could be ineffective against the debtor’s property. That creditor would then rank as an unsecured creditor (except in relation to certain specific types of secured assets that can be perfected by possession or control) should the debtor become insolvent or bankrupt.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Assuming there are no issues in connection with the execution, authorization and delivery of the relevant underlying security documents, secured creditors may enforce their security in accordance with the terms of the underlying security documents upon providing the debtor(s) with reasonable notice of its intention to do so. In such circumstances, debtors are typically deemed to have been afforded reasonable notice upon either:

    i) the expiration of the ten (10) day notice period following the delivery to the debtor(s) of a notice of intention to enforce security as required pursuant to section 244 of the BIA; or

    ii) the waiver by the debtor(s) of such ten (10) day notice period.

    In circumstances where there is concern that assets may be dissipated, depleted or impaired prior to the expiration of the ten (10) day notice period provided for under section 244 of the BIA, secured creditors may seek a court order appointing an interim receiver to monitor the management and operations of the debtor(s) with a view to preserving assets for the benefit of the secured creditor(s).

    Generally, security agreements provide secured creditors with rights to (i) appoint a private receiver over the assets and property of the debtor(s), which does not require court involvement, and/or (ii) seek the court-appointment of a receiver over the assets and property of the debtor(s).

    Nothwithstanding the foregoing, if a debtor company is successful in obtaining an initial order pursuant to the CCAA (discussed at greater length in question 8), secured creditors are stayed from enforcing their security as against such debtor.


    In Québec, hypothecary creditors (as well as the holders of most prior claims, mutatis mutandis) may only, apart from conservatory measures and a personal action against the debtor, exercise one of four (4) recourses as against the hypothecated property:

    (i) taking possession of the hypothecated property for purposes of administration: the creditor is granted the right to collect the revenues generated by the hypothecated property until satisfaction of his claim;

    (ii) taking the hypothecated property in payment: the property is transferred to the creditor and, in return, the creditor’s claim is extinguished entirely (regardless of the actual value of the hypothecated property);

    (iii) sale of the hypothecated property by the creditor: the creditor sells the hypothecated property, either by agreement, by a call for tenders or by auction, and collects the proceeds of the sale up to the amount of the claim; and

    (iv) sale under judicial authority: the Court supervises, directly or indirectly, a sale process for the hypothecated property, the proceeds of which go to satisfy the hypothecary creditor. This is the most often preferred recourse, because the sale under court supervisions will purge most real rights attached to the property sold, which is not the case of a sale by the creditor.

    It is important to note that none of these four recourses include the appointment of a private receiver. Private receivers are not used in Quebec. However, a hypothecary creditor may opt to take possession of the hypothecated property for purposes of administration and delegate this administration to a third-party manager; in practice, this resembles the appointment of a private receiver in common law jurisdictions.

    Each of the aforementioned recourses must abide by specific rules, although each of them require the same preliminary conditions and measures.

    First, the debtor must be in default, the claim must be liquidated and must be due. Second, the creditor must then file a prior notice with the appropriate public registry along with evidence that it has been served on the debtor and, if applicable, on any person against whom the creditor intends to exercise his real rights. Third, the creditor cannot exercise its rights before the expiry of the period specified in the prior notice. This period is 60 days if the hypothecary rights are exercised on immoveable property, but may be 10, 20, or 30 days in other cases. The period may be shortened by order of the Court, if the Court is satisfied that recovery of the creditor’s claim is in peril, or where the property may depreciate rapidly. Fourth, the prior notice must disclose the default(s) that the debtor has committed, the hypothecary right which is intended to be exercised, the hypothecated property on which the hypothecary right is to be exercised, and the amount of debt owed to the creditor.

    After being served with the prior notice, the debtor (or any person against whom the creditor intends to exercise his real rights) may defeat the creditor’s recourse by remedying all the defaults specified in the prior notice as well as any subsequent default. They may do so until the moment that the creditor’s rights are fully affected, e.g. when the sale is perfected or the property is transferred to the creditor, either by agreement or by final judgment of a competent court. If the debtor or other person serviced with the prior notice cannot or refuses to remedy all the defaults, they must surrender the hypothecated property. Forced surrender may be obtained if the debtor or noticed party does not voluntarily surrender the property.

    Subject to a few exceptions, such as a sale under Court supervision, and in the absence of contestation, it is possible that Courts will not be involved at all in the enforcement of hypothecary rights.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    Pursuant to section 2 of the BIA, an insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under the BIA amount to Cdn$1,000, and

    (i) who is for any reason unable to meet his obligations as they generally become due;

    (ii) who has ceased paying his current obligations in the ordinary course of business as they generally become due; or

    (iii) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.

    While there are no formal or express obligations imposed on directors or officers of debtors to open insolvency procedures under Canadian law, they are required to govern themselves in accordance with the corporate duties imposed on them and discussed at greater length in Question 14 (see below). While directors may consider other stakeholders (including creditors) when executing their duties, their obligations to act reasonably and in the best interests of the corporation are owed solely to the corporation.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    The two main insolvency procedures are (i) a bankruptcy and (ii) a receivership.



    An insolvent liquidation is commonly carried out as a bankruptcy under the BIA. In the context of a liquidation, the BIA is intended to provide for the fair distribution of the debtor's unencumbered assets among its unsecured creditors.

    The right to file a claim and receive a dividend in the distribution of the proceeds derived from the liquidation of the bankrupt's unencumbered assets replaces all of the pre-bankruptcy remedies of the debtor's unsecured creditors. However, the bankrupt's secured creditors can also enforce their security outside of the administration of bankruptcy.


    When a debtor is insolvent, a bankruptcy can be initiated in three ways:

    i) the debtor voluntarily assigns itself into bankruptcy;

    ii) the debtor is involuntarily placed into bankruptcy by its creditors; or

    iii) the debtor becomes bankrupt as a result of the failure of the BIA Proposal (see Question 8).

    If the debtor assigns itself into bankruptcy voluntarily, he can choose a trustee. However, if the debtor is involuntarily placed into bankruptcy, he will have one appointed for him.

    For a corporate debtor, initiation also requires the company's board of directors to pass a resolution prior to the court approving the assignment into bankruptcy.

    Substantive Test

    The debtor is considered bankrupt when he:

    i) has debts of at least Can$1,000 owing to its creditors; and

    ii) has committed an act of bankruptcy within the six (6) months prior to the application for a bankruptcy order, which may include having become insolvent and unable to meet its financial obligations generally as they become due.

    Consent and Approvals

    An involuntary bankruptcy is made by order of the court upon application by one or more creditors of the debtor. A voluntary bankruptcy is commenced by the trustee in bankruptcy selected by the debtor filing an assignment in bankruptcy with the Superintendent of Bankruptcy (that is, an independent government agency responsible for the supervision and integrity of the Canadian bankruptcy system).

    Supervision and Control

    Once the bankruptcy is effective, all of the debtor's property and assets vest in the trustee and the debtor ceases to have any control over its affairs. The trustee must be licensed by the Superintendent of Bankruptcy. In a corporate bankruptcy, the trustee:

    i) replaces the management of the corporation; and

    ii) assumes full control over all of the debtor's property and assets.

    Secured creditors retain their right to enforce on their security.

    Protection from Creditors

    Once a debtor has become bankrupt, all of the debtor's property, wherever located, vests in the trustee subject to the rights of secured creditors. The trustee then proceeds to administer the estate for the benefit of the bankrupt's unsecured creditors. The BIA provides for an automatic stay of proceedings once the bankruptcy has commenced. The debtor's unsecured creditors are prevented from:

    i) exercising any remedy against the debtor or its property; or

    ii) commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy.

    The bankruptcy stay does not affect secured creditors, who are generally free to enforce their security outside of the liquidation process provided they do so in a commercially reasonable manner.

    The law governing intellectual property licenses in a bankruptcy proceeding is unclear and licensees may lose their rights to use the intellectual property upon the bankruptcy of the licensor. The trustee-in-bankruptcy has the authority to disclaim executory contracts. Accordingly, the licensee may wish to have the license agreement deemed to be a non-executory contract in the drafting of the license agreement in order to prevent a subsequent trustee-in-bankruptcy from being able to disclaim the license agreement in the bankruptcy proceedings of the licensor.

    Length of Procedure

    Unlike a BIA Proposal, there is no specified timeline for bankruptcy proceedings (see Question 8, BIA Proposal).


    The debtor's assets (after secured creditors have realized their security and after the payment of super-priority creditors) are distributed on a pro rata basis among the unsecured creditors in accordance with their proven claims. The bankruptcy concludes once the trustee has distributed all the proceeds realized from the sale of the property and assets of the debtor to the debtor's creditors and the trustee has been discharged by the court.


    The BIA also provides for the enforcement of security and the appointment of receivers on a national basis. A secured creditor who plans to enforce its security on all or substantially all property and assets of an insolvent debtor must give prior notice of its intention to do so pursuant to section 244 of the BIA and then must wait ten (10) days after sending the notice before taking further steps, unless the debtor consents to an earlier enforcement at the time of the delivery of the 244 notice, unless the creditor is able to persuade the court that an “interim receiver” should be appointed.

    Duties of Receiver Upon Appointment

    Once the receiver is appointed the receiver must:

    i) give notice of its appointment to all creditors;

    ii) issue reports on a regular basis outlining the status of the receivership; and

    iii) prepare a final report and statement of receipts and disbursements when the appointment is terminated.

    Appointment of a Receiver

    A receiver or receiver/manager is appointed either:

    (A) Privately, by a secured creditor. Where a security agreement provides for the private appointment of a receiver, the powers of the receiver must also be set out in the agreement. Unlike a court-appointed receiver (see below), a private receiver's loyalties lie with the appointing creditor, and the receiver will work to maximise recoveries for the creditor. Privately appointed receivers usually have broad powers, including the power to:

    i) carry on the business; and

    ii) sell the debtor's assets by auction, tender or private sale.

    Although private appointments can reduce costs and delays and provide the secured creditor with greater control over the realisation process, it is often advisable to obtain a court appointment. This is especially the case if:

    i) there are major disputes among creditors or with the debtor; and/or

    ii) it is clear that the assistance of the court will be required throughout the receivership.

    It is also often important to potential purchasers of the assets of the debtor from the receiver to have the protection of a court order approving the sale of assets.

    In Québec secured creditors may not appoint private receiver. The only recourses available to hypothecary creditors and holders of prior claims are the four (4) recourses set out in the Québec Civil Code (see Question 2).

    (B) By Court Order. The jurisdiction for a court appointment of a receiver is found in the applicable provincial judicature acts and rules for court proceedings (except Québec) and pursuant to section 243 of the BIA. A receiver can be appointed under the rules for court proceedings and applicable provincial judicature acts alone, but it is more common for the appointment to be made under both the BIA and the rules for court proceedings/judicature acts. A court appointment may be necessary if the debtor opposes the appointment of the receiver and will not give up possession of its property and assets to the receiver. In certain provincial jurisdictions, the courts will grant possession orders and affirm the appointment of a private receiver with powers as set out in the security documents, and thereby avoiding the requirement for a formal court appointment.

    The court's appointment of a receiver usually begins with a secured creditor commencing an action or application against the debtor. The receiver is then appointed in a summary proceeding within the action or application. The order appointing the receiver usually follows a “model” Receivership Order, similar to the “template” CCAA Initial Order (discussed below, see Question 8). The Receivership Order typically:

    i) stays proceedings against the receiver and debtor;

    ii) provides the receiver with control over the property and assets of the debtor;

    iii) authorizes the receiver to carry on the debtor's business and to borrow money on the security of the assets; and

    iv) ultimately authorizes the receiver to sell the debtor's property and assets with the approval of the court.

    The Receivership Order also typically authorizes the receiver to commence and defend litigation in the debtor's name.

    While the duty of a privately-appointed receiver is primarily to the appointing secured creditor (subject to a general duty to act in a commercially reasonable manner), the court-appointed receiver is an officer of the court and has a duty to protect the interests of all of the debtor's creditors. By the nature of its appointment, a court-appointed receiver may not be entitled to obtain an indemnity from the secured creditor who sought the appointment.

    In Québec, the Code of Civil Procedure provides for the appointment of a “judicial receiver”, called a “sequestrator”, for the duration of any litigation. The court may, even on its own initiative, order the sequestration of disputed property if it considers it necessary to preserve the parties’ rights in the property, for example, in the case of an immovable left unmaintained. The sequestrator is then put in possession of the movable or immovable property in dispute for the duration of the litigation. As opposed to common law jurisdictions, this is rarely done in practice in Québec, but is available nonetheless in any litigation, if warranted, including in a litigation between a secured creditor and its debtor.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    Ranking of Creditors and Other Stakeholders and Priorities

    Creditor claims on a debtor's insolvency rank in the following order:

    i) Super-priority claims. These include:

    • valid trust claims;
    • realty property taxes;
    • certain deemed trusts and super-priority pension and wage claims;
    • claims under the Wage Earner Protection Act;
    • qualified unpaid supplier claims, commonly referred to as "30-day good claims" or "revendication claims" (these are similar to reclamation rights under the US Bankruptcy Code);
    • unremitted payroll deductions; and
    • court-ordered charges in CCAA proceedings and bankruptcy proceedings.

    ii) Secured claims. These are established under the applicable provincial personal property security legislation (for example, the Personal Property Security Act in Ontario or the Québec Civil Code in Québec) and are ranked according to the legislative scheme under which they are devised.

    iii) Preferred unsecured claims. These include:

    • landlord claims for up to three months' arrears of rent and three months accelerated rent, if provided for in the applicable lease agreement;
    • amounts that would been paid to a secured creditor but for the payment of wage and pension claims; and
    • certain workers' compensation claims.

    iv) General unsecured claims. These rank pari passu with each other.

    Creditor claims have priority over shareholder claims. Secured creditors rank ahead of preferred and unsecured creditors other than for certain claims that are given priority under statute. In some instances, the priorities may differ depending on the type of insolvency proceeding.

    Equitable Subordination

    A bankruptcy court in Canada may, if the circumstances warrant it, subordinate an otherwise pari passu claim to another. Although neither the BIA nor the CCAA expressly reference “equitable subordination”, section 183(1) of the BIA provides that certain enumerated courts are “invested with such jurisdiction at law and in equity as will enable them to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings”.

    Courts have been hesitant to definitively pronounce on the doctrine’s availability in Canada; nevertheless, Canadian courts have applied the doctrine both expressly or by implication.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    The BIA and the CCAA allow for pre-insolvency transactions to be set aside in two situations:

    i) preference; and

    ii) transactions at undervalue.

    Provincial legislation permits the setting aside of preferences and transactions to defeat, delay or defraud creditors and can be used where the applicable BIA time periods have passed.

    A trustee (under the BIA), and a monitor (under the CCAA), can initiate proceedings to challenge a transaction as a preference or transfer at undervalue. In situations where the trustee refuses to act, a creditor can initiate proceedings.


    In a preferential transaction, one creditor receives payment over another creditor before the initial bankruptcy event, or the date proceedings were commenced under the CCAA, with the effect of the debtor preferring one creditor over another.

    For a transaction to be considered a preference:

    i) If the debtor and creditor are not related, it must have been made within three (3) months of the initial bankruptcy event (or the date proceedings were commenced under the CCAA).

    ii) If the parties are related, such as a family member, it must have been made within twelve (12) months of the initial bankruptcy event (or the date proceedings were commenced under the CCAA).

    A transaction deemed preferential is void and will be set aside by the court. The money is then distributed to the bankrupt's estate in the order set out in Question 5.

    Transactions at Undervalue

    In a transaction at undervalue, if the debtor was insolvent at the time the transaction occurred, or became insolvent as a result of the transaction, and the intent of the debtor was to defeat, delay or defraud its creditors. The transaction must have occurred:

    i) If the parties are not related, within one year of the commencement of the bankruptcy proceedings (the date that proceedings were commenced under the CCAA); or

    ii) If the parties are related, within five years of the commencement of the bankruptcy proceedings (the date that proceedings were commenced under the CCAA).

    When the Court determines that a transaction at undervalue has occurred, the Court can:

    i) set aside the transaction; or

    ii) order the recipient to pay the difference between what the debtor paid for the property and the actual fair market value of the property.

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?


    Protection from Creditors

    As previously stated (see Question 4), once a debtor has become bankrupt, all of the debtor's property, wherever located, vests in the trustee subject to the rights of secured creditors. The trustee then proceeds to administer the estate for the benefit of the bankrupt's unsecured creditors. The BIA provides for an automatic stay of proceedings once the bankruptcy has commenced. The debtor's unsecured creditors are prevented from:

    i) exercising any remedy against the debtor or its property; and

    ii) commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy.

    Extraterritorial Effect?

    The bankruptcy stay is of national force and effect, but it does not have extraterritorial effect. Recognition proceedings must be sought in any jurisdiction outside of Canada for the stay to become enforceable in such jurisdiction (see Question 16).

    Exceptions to Stay

    The bankruptcy stay does not affect secured creditors, who are generally free to enforce their security outside of the liquidation process. The stay also does not affect the claims of holders of eligible financial contracts with the debtor or the actions of governmental, administrative and regulatory bodies such as the Crown and the provincial securities commissions in carrying out their regulatory or administrative duties, other than the enforcement of a payment ordered by the regulatory body.


    Protection from Creditors

    The order appointing the court-appointed receiver will typically provide for a stay of proceedings against the receiver and debtor (see Question 4).

    Extraterritorial Effect?

    A receiver appointed under the BIA has jurisdiction across Canada, unlike a receiver or receiver and manager appointed under provincial legislation who has no power outside the province of its appointment. Accordingly, the stay of proceedings that is effective upon the court appointing a receiver under the BIA is of national force and effect – there is no need to seek recognition orders in each province.

    The stay contemplated by a receivership order does not have extraterritorial effect. Similar to a bankruptcy, recognition proceedings must be sought in the jurisdiction outside of Canada for the stay to become enforceable in such jurisdiction (see Question 16).

    Exceptions to Stay

    The stay does not affect the claims of holders of eligible financial contracts with the debtor as well as the regulatory actions of governmental, administrative and regulatory bodies such as the Crown and the provincial securities commissions. The model receivership order specifically contemplates that there is no exemption provided to the receiver or the debtor from compliance with statutory or regulatory provisions relating to health, safety or the environment.

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    In Canada, the statutes under which an insolvent debtor may restructure its business are the BIA and the CCAA, while the Canada Business Corporation Act (“CBCA”) and most provincial business corporation statutes contain provisions facilitating the restructuring of solvent corporations.

    Restructuring under the BIA

    The BIA is the appropriate choice of restructuring statute for insolvent debtors who are natural persons and small or mid-sized corporations. This is so because of the administrative nature of its process, which revolves around forms and dealings with governmental authorities and, in the absence of dispute, may limit Court intervention to a minimum and thus lower legal and other professional costs. The BIA is however less commonly chosen for the restructuring of large corporations due to its statutory rigidity as compared to the CCAA.

    A restructuring under the BIA is achieved by way of a contract (referred to in the BIA as a “Proposal”) which is proposed by the insolvent debtor, agreed to by the requisite majority of its unsecured creditors, and approved by the Court. For example, the Proposal could provide for the compromise and re-characterization of creditor claims, defer the payment of claims, or convert debt into equity.

    To initiate the restructuring process, the debtor must either file a Proposal or a notice of intention to make a Proposal to its creditors (an “NOI”). It is fairly rare that a debtor directly files a pre negotiated Proposal, but it is nevertheless possible.

    From the moment the NOI is filed, all proceedings against the debtor and the debtor’s property, either commenced or not, are automatically stayed, including the secured creditors’ enforcement of their security, without requiring a Court order. The stay, which is intended to provide the debtor with some “breathing room” during the Proposal negotiation process, is of an initial period of thirty (30) days and may be extended by the Court to up to six (6) months by increments of a maximum of forty-five (45) days each. A creditor may apply to the Court to lift the BIA stay, but must prove that the continuation of the stay would cause the creditor material prejudice, which is a high threshold.

    At the outset of the NOI, a licensed trustee in bankruptcy must accept to act in connection with the Proposal process. The trustee will monitor and draft reports in respect of the proceedings, for the benefit of all stakeholders and, as the case may be, the Court. The trustee will also typically assist the debtor in negotiating with its creditors and formulating the Proposal. The corporate debtor’s governance will not be affected by reason of the NOI. Management is not displaced and continues to operate the debtor’s business as a going concern.

    In order to succeed, the BIA Proposal must be agreed to by a “double majority” of unsecured creditors who have duly proven their claims against the debtor before the statutory deadline. The “double majority” is obtained if the Proposal attracts the approval vote of 50%+1 in number of unsecured creditors voting as well as the approval vote of creditors collectively holding at least two-thirds of the aggregate value of all unsecured creditors’ claims against the debtor. Creditors who have not duly proven their claims will not be able to vote on the Proposal but will be bound by its terms once approved by the requisite number of creditors and the Court and is implemented.

    The BIA does not require that secured creditor support the Proposal, or that the Proposal include a class of secured creditors. If the Proposal does include the claims of secured creditors, the Proposal will fail if is not accepted by the “double majority” of secured creditors in each class of secured creditors affected by the Proposal. Of course, classification issues can arise if the Proposal is made to secured creditors, as once the “double majority” of secured creditors in each class votes in favour of the Proposal, the Proposal is binding on all the creditors in that class. If the Proposal does not receive the requisite votes, the debtor will be deemed to have made an assignment in bankruptcy and the debtor’s property and assets will be liquidated in accordance with the provisions of the BIA. There is no “cram-down” provision under the BIA.

    If the Proposal is accepted by the requisite “double-majority” of unsecured creditors and, as the case may be, the “double-majority” of secured creditors in each class of secured creditors if included in the Proposal, the trustee will prepare a final report and seek Court approval of the Proposal. The BIA is prescriptive as to certain claims for which the debtor may not compromise under the Proposal. For example, the Court may not approve the Proposal which does not pay in accordance with various statutory guidelines tax, employee benefits, and pension related claims. Importantly, the Court may also not approve the Proposal which provides that an equity claim is to be paid before all other claims affected by the Proposal are paid.

    Once the Proposal has been approved by the Court, it essentially constitutes a “new deal” between the debtor and its unsecured creditors (as well as the classes of secured creditors, if any, included) and replaces any prior agreements, subject to the terms of the Proposal itself. Creditors who had not proven their claims before the statutory time limit to do so and accordingly, did not vote on the Proposal are permitted to prove their claims afterward in order to receive a distribution or other benefit under the Proposal.

    Restructuring under the CCAA

    The CCAA is the restructuring statute of choice for large insolvent corporations. The prescriptive provisions under the CCAA are quite limited and the Court is given broad discretion in respect of the interpretation and application of the applicable provisions of the CCAA.

    Restructurings under the CCAA are achieved, as in the case of the BIA Proposal, through a contract, referred to in the CCAA as a “plan of arrangement or compromise” (a “Plan”), which is proposed by the debtor company, agreed to by the requisite majority of its creditors, and approved by the Court. For example, the Plan could provide for the compromise and re-characterization of creditor claims, defer the payment of claims, or convert debt to equity.

    A company or group of companies is eligible to use the CCAA if it is bankrupt or insolvent and if it has claims exceeding Cdn$5,000,000. Evidence that the debtor cannot meet its obligations generally as they become due is usually sufficient for the Court to conclude that the debtor is insolvent within the meaning of the CCAA.

    Restructuring proceedings under the CCAA are commenced by the applicant seeking an Initial Order. Creditor-initiated CCAA proceedings are possible but rare as compared to debtor-initiated proceedings.

    Typically, the motion for an Initial Order will be filed with supportive documents, including the affidavit from an officer of the debtor along with a pre filing report of the proposed Monitor (discussed in more detail below) and a draft Initial Order which generally follows a “template” or “model” Initial Order. The “model” Initial Order is neither statutory, nor regulatory, but has been developed by insolvency practitioners and adopted by the applicable Courts in each province across Canada.

    The Initial Order will typically provide, inter alia, as follows: (i) an initial stay of proceedings against all creditors of the debtor, including secured creditors for 30 days; and (ii) a stay of proceedings against the corporate debtor’s directors and officers. The initial stay period is may be extended by the Court for longer periods, without statutory limitation. A creditor may apply to the Court to lift the CCAA stay, but must prove that the stay would cause material prejudice to such creditor.

    The CCAA requires that a Monitor, generally an accounting or financial advisory firm, be appointed. In most cases, the Initial Order does not alter the debtor’s corporate governance, or provide for the Monitor to take control of the debtor company’s business. The Monitor is an officer of the Court and owes a duty to all stakeholders. The Monitor has certain minimum statutory responsibilities, including to (i) report to the Court on the reasonableness of the debtor’s cash flow statements; (ii) report to the Court as regards the state of the debtor’s business and financial affairs and the cause of its financial difficulties; (iii) advise the Court on the reasonableness and fairness of any Plan that is proposed between the debtor and its creditors; and (iv) report to the Court in connection with every material adverse change in the business or financial affairs of the debtor. In practice, the Monitor is independent and impartial, but is expected to assist the debtor in its restructuring and must also consider, communicate with and take into account the interests of all stakeholders in the restructuring process. The Monitor will be required to file regular reports with the Court, notably in respect of any sale of assets outside of the normal course of business, stay extensions, seeking Court instructions, and the disclaiming any contracts by the debtor company. The Monitor’s reports are made available to the public on the Monitor’s website. The Court typically relies on the Monitor’s reports before rendering any order in a CCAA proceeding.

    The CCAA does not provide a fixed timeframe for the development of the Plan. In practice, the negotiation of the Plan may take several months. In order for the Plan to be approved it must be approved by a “double-majority” of the creditors’ voting on the Plan, either in person or by proxy. The double majority approval is the same as is required under the BIA Proposal: approval of 50%+1 in number of creditors voting and holding at least two-thirds of the aggregate value of the proven claims made against the debtor. There is no statutory consequence if the Plan fails to secure the approval of the “double-majority” of creditors. As with the BIA Proposal, there are no “cram down” provisions under the CCAA so if a class of creditors does not approve the Plan, the Plan will fail. Unless a creditor, or group of creditors seek to force the debtor corporation into bankruptcy, the debtor corporation could proceed with formulating a new Plan to be voted on by the creditors.

    If the Plan is approved by all a classes of creditors by the required “double-majority, the Plan must be approved by the Court. On the motion for Court approval of the Plan, the Court will look critically at the Plan and ensure that the Plan is fair and reasonable in respect of its effect on the rights of creditors. The Plan may address claims made against directors and officers of the corporate debtor but may not deal with claims that would arise after the approval of the Plan.

    Following approval by the debtor’s creditors and the Court and upon implementation, the Plan will be binding on the debtor and all of its creditors and will replace any prior agreement between them, subject to the terms of the Plan.

    Even though the primary objective of CCAA proceedings is to effect a restructuring of the debtor’s business pursuant to the terms of a Plan with its creditors, the CCAA has also been effectively used to effect a sale and/or a liquidation of the debtors business and operations under Court supervision and with the assistance of the Monitor.

    Restructuring under Business Corporation Statutes (e.g. CBCA)

    The CBCA and most provincial business corporation statutes permit corporations incorporated thereunder to effect fundamental corporate changes, such as mergers, acquisitions, reorganizations and other transactions, through a Court approved plan of arrangement (“Plan of Arrangement”), circumventing the sometimes burdensome corporate statutes. In principle, arrangements under most corporate statutes are reserved exclusively for use by solvent corporations. However, the CBCA has been successfully applied to restructure groups of companies where at least one company was solvent, with the primary goal being the compromise of debt, the dilution of existing equity and, even, the issuance of new equity.

    The main benefit of the arrangement process is that it is typically much simpler and faster method of achieving a restructuring as opposed to a formal filing under the CCAA or the BIA. The process can be completed in as little as thirty (30) days from the date of obtaining the interim order. One downside of a CBCA Plan of Arrangement is that it is typically only used to effect a restructuring of the debtor’s capital structure.

    The typical CBCA arrangement process proceeds as follows:

    Prior to initiating the arrangement process under the CBCA, the applicant corporation, with input from its security holders, prepares an information circular which outlines the terms of the proposed Plan of Arrangement. This information circular is distributed to the debtor’s security holders, who will vote on the Plan of Arrangement. If the Plan of Arrangement is approved by the requisite majority, a notice of the arrangement is given to the CBCA Director (the “Director”), an administrative body of the federal Government. The Director will consider whether the statutory requirements for an arrangement have been met and can request further information and documents.

    Once the Director is satisfied, the actual CBCA arrangement process may be initiated through an application by the corporation to the Court for an Interim Order. The Interim Order typically sets out the “procedural road map” for the arrangement process, including the framework for dissemination of information and documents to relevant stakeholders and the meetings of the shareholders for the purposes of voting on the Plan of Arrangement.

    The CBCA does not set out a specific voting approval threshold. Typically, 66⅔% of the votes in each class of security holder has been required in order to approve the Plan of Arrangement, but in certain cases, CBCA Plans of Arrangement have been approved by the Courts even if the 66⅔% threshold had not been achieved. After the vote, the corporation will apply to the Court for a final order approving the implementation of the Plan of Arrangement and a declaration from the Court that the Plan of Arrangement is fair and reasonable. If the Court approves the Plan of Arrangement, the final order will authorize the corporation to file its articles of arrangement and complete the transaction provided for in the Plan of Arrangement.

    Throughout the CBCA Plan of Arrangement process, the Court is given broad powers to make any order it deems appropriate. In certain cases the Court has also made orders during the CBCA Plan of Arrangement proceedings staying all proceedings against the applicant corporation, or staying affected creditors from exercising termination and enforcement rights under their agreements with the debtor.

  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    In both BIA and CCAA restructurings, the Court may order that all or part of the debtor’s property be subject to a security interest or charge, in favour of a lender, that ranks ahead of the debtor’s secured creditors.

    The Court will grant a prior-ranking charge for interim debtor-in-possession financing (“DIP Financing”) after considering (i) the progress the debtor has made in respect of a Proposal or Plan; (ii) the opposition (or absence) of secured creditors; (iii) the nature and value of the debtor’s property; (iv) whether the loan would enhance the prospect of a viable Proposal or plan; and (v) the Trustee’s/Monitor’s report and opinion as to the necessity and reasonableness of the proposed DIP Financing and corresponding DIP Financing priority charge. The security or charge is to secure obligations that are incurred after the making of the Initial Order, or filing of the NOI. It is not uncommon in a CCAA restructuring that the DIP Financing charge be created at the time that the Initial Order is granted.

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

    CCAA plans of arrangement and BIA Proposals typically provide for the release of the debtor company’s directors and officers from tort or contributory claims relating to the insolvency of the debtor company, although Courts will rarely release directors and officers from claims arising from allegations of fraud and gross negligence.

    There is also considerable jurisprudence in Canada in favour of Court-ordered third-party releases in the context of class action-related CCAA restructurings. The typical example is as follows:

    The debtor company is crippled by having to defend in a tort-related class action litigation and resorts to seeking CCAA protection. The debtor company holds contribution (or, in Québec, “recursory”) claims against third-parties. The debtor company seeks to monetize these claims by reaching advance settlement agreements with those third parties. The third parties agree to pay the debtor company in consideration for the release of the contribution/recursory claim, but conditional on the debtor company obtaining an order whereby the third parties are also released from the claims that any fourth party could have against them in relation to the events surrounding the class action. In considering whether to grant the order with the releases sought, the Court will consider, among other things, the following: (i) whether the third parties’ contribution is reasonable and will be sufficiently instrumental to the debtor company being able to negotiate a successful Plan; and (ii) whether the proper administration of justice militates in favour of the releases, in order to avoid a multiplicity of proceedings.

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?

    The BIA provides, in a bankruptcy, for the appointment by the creditors of inspectors who will represent the interests of the creditors collectively. Inspectors are optional in the context of a BIA Proposal. It is, however, rare that a Proposal provides for the appointment of inspectors. In a bankruptcy the creditors must nominate inspectors, except in cases of “summary administration” (i.e. liquidations where the debtor is a natural person and its estate is worth less than five thousand dollars ($5000) after satisfaction of the secured creditors). Inspectors oversee the bankruptcy proceedings and must approve, among other things, the sale of most assets and, at the conclusion of the bankruptcy, the trustee’s final report and its fees.

    Despite the absence of provisions pertaining specifically to the appointment of creditors’ representatives or creditor committees in proceedings under the CCAA (as opposed to Chapter 11 of the US Bankruptcy Code), Canadian Courts have on occasion ordered the creation of “creditor committees” and ordered that the legal expenses of such creditor committees to be paid by the debtor’s estate.

    The Courts have also frequently appointed representatives for certain classes of creditors. The following factors are among those considered by the Courts in determining whether to order the appointment of a representative of a certain class of creditors in CCAA proceedings and whether to order a charge in their favour securing their professional fees and other costs: (i) whether the creditors in that class are vulnerable or lacking the resources necessary to obtain adequate counsel and protection in the CCAA proceedings (e.g. employees, retirees, small investors, subcontractors, etc.); (ii) whether the creditors in that class have common interests; (iii) whether the appointment would facilitate the administration of the proceeding and its efficiency; (iv) the opposition (or absence thereof) of other stakeholders; and (v) the position of the Monitor.

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?

    Termination of Agreement by Debtor

    After filing an NOI or a Proposal under the BIA, or after obtaining an Initial Order under the CCAA, a debtor (except a debtor who is a natural person and who does not operate a business) may, with the approval of the Trustee or Monitor and with notice to the other party or parties to an agreement, disclaim most agreements.

    If the Trustee or Monitor does not approve the termination of the agreement, the debtor may apply to the Court for a determination in respect of same. The counterparty to the agreement to be disclaimed may also oppose the termination and apply to the Court for a determination in respect of same. The Court, in deciding whether to allow the contract to be terminated or not, will consider, among other things, (i) the approval or opposition of the Trustee or Monitor; (ii) whether the termination would enhance the prospect of a viable Proposal or Plan; and (iii) whether the disclaimer would likely cause significant financial hardship to a party to the agreement. If a counterparty to an agreement that is disclaimed by the debtor suffers a loss as a result of the termination the counterparty will have a claim in the restructuring for damages. The claim may then be addressed within the terms of the Proposal or Plan.

    Certain types of agreements may not be terminated, such as “eligible financial contracts” (i.e. derivatives), financing agreements where the debtor is the borrower, and most leases where the debtor is the lessor. Specific rules also apply to intellectual property-related agreements, where a counterparty’s contractual rights, including the right to use the IP and extend the agreement, may not be altered for as long as the counterparty respects its obligations as per the agreement. With respect to collective agreements, the Court may order a renegotiation, but neither the Court nor the debtor may terminate or alter the collective agreement outright.

    Termination of Agreement by the Counterparty

    After a debtor has filed an NOI, a the Proposal under the BIA, or after the debtor has obtained an Initial Order under the CCAA, no party to an agreement with the debtor, including a security agreement but excluding “eligible financial contracts” (i.e. derivatives), may terminate or amend the agreement, or claim an accelerated payment or a forfeiture of the term (even if provided for in the agreement) by reason only that the debtor is insolvent, has filed an NOI, a Proposal, or has obtained an Initial Order. The words “by reason only” are important: any right of a counterparty to terminate an agreement with the debtor for another valid reason, repetitive failure to pay for example, remains enforceable.

    In the case of a lease where the debtor is the lessee or with respect to a public utility contract (e.g. Internet, telephone, electricity, etc.), the lessor or the public utility company may not terminate their agreement with the debtor by reason only that the debtor has not paid rent or royalties or made any other payments of a similar nature, as applicable, in respect of a period preceding the filing of the NOI or the Proposal, or preceding granting of the Initial Order. However, no counterparty to any agreement with the debtor, including lessors and public utility companies, is obliged to advance money or credit to the debtor, or do anything with delayed payment, after the NOI or the Proposal has been filed, or after the Initial Order has been obtained. This means that, in practice, as soon as the NOI or the Proposal is filed, or as soon as the Initial Order is obtained, all commercial partners of the debtor who choose to continue to do business with the debtor may do so on a “cash on delivery” basis, demanding immediate payment for goods, services, use of leased or licensed property or other valuable consideration, as the case may be, in the post-filing or post-Initial Order period.

    The foregoing trumps any agreement to the contrary and cannot be contracted out of. Nevertheless, it remains within the discretion of the Court to order the termination of most agreements upon the counterparty demonstrating that it will suffer significant financial hardship if the agreement is not terminated.

    Assignment of Agreement

    On motion in a BIA, or CCAA restructuring, or in a bankruptcy, and on notice to every party to the agreement, the Court may order an assignment of the rights and obligations of the debtor (except if the debtor is a natural person who does not operate a business) under the agreement to another person, or entity who has agreed to the assignment. Certain contracts are excluded from such an assignment by their nature, including “eligible financial contracts” (i.e. derivatives) and collective agreements. In deciding whether to order the assignment, the Court will consider, among other things, whether the person to whom the assignment is to be made is able to perform the debtor’s obligations, and whether the assignment would be appropriate in general.


    The CCAA has generally been regarded as specifically preserving the law of set-off (or, in Québec, compensation), such that pre-filing debts may be set off against post-filing debts as there is no change of mutuality (i.e. the legal nature of the debtor remains unchanged) as there would in a bankruptcy. The Courts have adopted this provision in the context of BIA Proposal proceedings. However, there has been some uncertainty in recent years as to whether this is always the case. In the 2017 decision, Arrangement relatif à Métaux Kitco inc., the Quebec Court of Appeal determined that only mutual debts existing as of the date of the initial order may be set-off in a CCAA restructuring. Accordingly, pre-filing debts may not always be set-off against post-filing debts in Quebec.

    In the context of either a bankruptcy or a receivership, set-off rights may be exercised by or against the debtor, as per provincial law, provided that the obligations that are being set-off, or compensated, both arise either before or after the date of the bankruptcy, or the Receivership Order.

  13. What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

    In BIA/CCAA restructurings, the Court must approve any sale of property outside of the normal course of business. In deciding whether to approve such a sale the Court is to consider, among other things, (i) whether the process leading to the proposed sale or disposition was reasonable and approved by the Trustee/Monitor; (ii) the report and opinion of the Trustee/Monitor; (iii) whether creditors oppose the sale; and, most importantly (iv) whether the consideration to be received for the assets is fair and reasonable, taking into account their market value.

    In a bankruptcy, the Trustee has broad powers to monetize the debtor’s estate, including any sale of assets, subject to the approval of the inspectors, if required. The Trustee does not have the power to alter rights attached to the property sold at the moment of the sale – the property is usually sold on an “as is, where is” basis.

    In both the restructuring and the liquidation contexts, and under both statutes, the Court has authority to order that any charge or security interest that attaches to the property or assets subject to the sale will be payable from the proceeds of the sale of such property or assets. Such an order is often sought in the restructuring process in order to attract potential buyers and collect funds which, in turn, may permit the negotiation of a viable Proposal or Plan.

    As to credit bidding and pre-packaged sales, both are valid and are part of Canadian insolvency practice.

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

    Directors’ Duties

    Directors have both statutory and common law duties and may be held liable if their conduct falls below the requisite standard of care, including in circumstances related to a distressed debtor. These duties are not limited to the insolvency period but allegations that such duties were not met are more likely to arise when a company is insolvent. Important duties that directors need to consider are its fiduciary duty and duty of care.

    Fiduciary Duty

    Directors’ fiduciary duty is the duty directors owe to the company itself and not to its creditors, shareholders or other stakeholders. During an insolvency, the emphasis remains on the company’s best interests. In order to meet this duty, directors must act honestly and in good faith with a view to the company’s best interests. The interests of other stakeholders may be considered as part of the directors’ effort to satisfy their fiduciary duty to the company.

    Duty of Care

    Directors’ duty of care requires directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. In order to avoid liability in connection with directors’ duty of care, directors must be able to demonstrate, among other things, that they:

    i) kept themselves apprised of relevant information;

    ii) sought expert opinions where necessary;

    iii) considered reasonable alternatives; and

    iv) made informed decisions.

    Liability of Stakeholders

    Generally, a director, corporate parent, or any other stakeholder will not be held liable for the debts of an insolvent company, subject to the exceptions described below.

    Directors’ Liability

    Certain statutes impose personal liability on corporate directors. All Canadian provinces and territories (which have jurisdiction over matters concerning labour relations) and the federal government (in relation to federally regulated industries) impose personal liability on directors for unpaid wages, accrued vacation pay and termination and severance pay (in certain cases).

    Directors are personally liable for payroll remittances for amounts deducted from employee’s wages on account of:

    i) income taxes;

    ii) Canada Pension Plan (or Québec Pension Plan, as applicable) contributions; and

    iii) employment insurance premiums.

    The above amounts are deducted from the pay cheques of the company’s employees. They are considered to be similar in nature to trust funds. However, directors have a defence against liability if they can prove:

    i) they were duly diligent; and

    ii) the failure to remit any required amounts in a timely manner was beyond their control.

    Directors can be held personally liable in situations where a company defaults in payment of its goods and services tax or harmonized sales tax (“HST") obligations. Canadian provinces which retain a separate retail sales tax (instead of HST) also impose personal liability on directors for failure to remit the required provincial sales tax.

    Directors can also be personally liable for failure to remit certain pension contributions, particularly for amounts which were deducted from the employees’ pay. In addition to specific statutory liabilities, corporate directors can also be personally liable if the director acted improperly so as to cause loss to the company’s creditors.

    Finally, if a director provides a personal guarantee in favour of a lender as a condition of advancing credit, there is the possibility of the director being subject to contractual liability.

    Notwithstanding the foregoing, directors may mitigate the financial burden of personal liability by seeking indemnification by the corporation, contractual indemnification and directors’ and officers’ insurance.

    Parent Company Liabilities

    Unless there is a contractual commitment stating otherwise, a parent company is not liable for an insolvent subsidiary’s debts.

    However, there is an exception to this rule for certain employee claims. At common law, it is possible for a court to determine that the employees of the insolvent subsidiary were also employees of the parent company, meaning the parent is jointly liable for the debts of the insolvent subsidiary to the employees. This situation may arise if the parent company has exercised common control over the subsidiary. Additionally, in certain circumstances, employment legislation in most Canadian provinces and territories permits liability to be imposed on a related company (such as a parent company, subsidiary or company within the same corporate group).

    Under tax legislation it is also possible for the parent to become liable for the insolvent subsidiary’s tax liabilities if the parent company has received assets from the subsidiary for less than fair market value.

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    There is no general or automatic release for directors or other stakeholders during a debtor company’s insolvency or restructuring proceeding. In the context of a CCAA or BIA Proposal proceeding, both acts provide that claims against directors that arose before the commencement of proceedings under either act and that relate to obligations of the debtor company for which the directors would, in law be liable by reason of their capacity as a director of the debtor company, may be compromised under the terms of the Plan or Proposal, as may be applicable. The following claims against directors cannot be compromised: claims in relation to (i) contractual obligations with one or more creditors of the debtor company, (ii) allegations of misrepresentation made by the directors to the creditors of the debtor company, or (iii) wrongful or oppressive conduct by the directors.

    As discussed in Question 10 above, there is significant precedent in Canada for the granting of third party releases in the context of class action-related CCAA restructurings.

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

    The core of the UNCITRAL Model Law on Cross-Border Insolvency was incorporated into the BIA and the CCAA. To date however, Canada has not implemented into its laws any of the provisions of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments and it remains unclear when or whether this will occur.

    Canadian Courts are supportive of international cooperation and comity in the context of cross-border insolvency proceedings involving property situated in Canada or under Canadian jurisdiction but commenced elsewhere in the world. Hence, upon application, Canadian Courts will recognize foreign bankruptcy and insolvency proceedings if satisfied that:

    i) the foreign proceeding is a judicial or administrative proceeding dealing with creditors’ collective interests under a law which provides for a foreign Court’s control or supervision of the property or affairs of a debtor for purposes of reorganization or liquidation; and

    ii) the applicant is a “foreign representative” within the statutory definition, that is, a person or body, including one appointed on an interim basis, who is authorized, in the foreign proceeding, to administer the debtor’s property or affairs for purposes of reorganization or liquidation, or was appointed as the foreign representative of the debtor by the foreign Court.

    If those conditions are met, the Court will issue an order recognizing the foreign proceeding as either a “foreign main proceeding” or a “foreign non-main proceeding”.

    The recognized foreign proceeding will be a “foreign main proceeding” if it is ongoing in the jurisdiction where the debtor has the center of its main interests, which, in the absence of proof to the contrary, is the jurisdiction of, in the case of a corporation, its registered office, and, in the case of an individual, his or her ordinary place of residence. Any other recognized foreign proceeding will be recognized as a “foreign non-main proceeding”.

    It is possible for a foreign representative to apply to the Canadian Court for the recognition of many foreign proceedings. For example, the Court could recognize a US proceeding as the “foreign main proceeding” in respect of a debtor, and Mexico, France and UK proceedings as “foreign non-main proceedings” in respect of the same debtor or group of companies.

    If the foreign proceeding is recognized as a “foreign main proceeding”, the Canadian Court is statutorily obliged to make an order, subject to any terms and conditions it considers appropriate, staying proceedings against the debtor in Canada and prohibiting the debtor from selling its property located in Canada outside of the ordinary course of business. In the case of a “foreign non-main proceeding”, such an order is not mandatory, but rather left within the Canadian Court’s discretion.

    In the context of both “foreign main proceedings” and “foreign non-main proceedings”, the Canadian Court retains wide discretion to make, on application by the foreign representative, “any order that it considers appropriate”, provided that it is necessary for the protection of the foreign debtor’s property or the interest of a creditor or creditors. This includes, among other things, the power to order and supervise the examination of witnesses and authorize the foreign representative to monitor the debtor company’s business and financial affairs in Canada for the purpose of reorganization. The Canadian Court also retains the discretion to refuse to do anything that would be contrary to Canadian public policy.

    In most recognition proceedings commenced in Canada, the Court will also appoint an information officer (typically an accounting, or financial advisory firm) who will be mandated to keep the Canadian Court and the Canadian creditors informed of any substantial developments in the recognized foreign proceeding.

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    The place of incorporation is essentially irrelevant to the determination of whether a corporation may commence restructuring or insolvency proceedings under the BIA and the CCAA.

    Under the BIA, the appropriate condition is whether the corporation “resides” in Canada (i.e. when the corporation has its head office in Canada) or whether the corporation carries on business or has property in Canada. The place of incorporation may be a criterion considered for the purpose of determining the place of residence of the debtor or in the analysis as to whether the corporation conducts business in Canada. Overall, this is a low threshold. In most cases, having a bank account or having its head office or residence (e.g. for tax purposes) in Canada is sufficient, absent factors to the contrary, to confer standing upon a debtor to seek BIA protection.

    The CCAA is even broader with respect to providing jurisdiction for companies that are seeking protection from their creditors under the CCAA. It is sufficient that the debtor company be bankrupt or insolvent and have claims against it in excess of CAD$5,000,000.

  18. How are groups of companies treated on the restructuring or insolvency of one or more members of that group? Is there scope for cooperation between office holders?

    Under Canadian insolvency law, there are two separate forms of consolidation in respect of groups of companies whereby one or more members of such group are subject to insolvency or restructuring proceedings: substantive consolidation, and administrative consolidation.

    Substantive Consolidation

    Substantive consolidation refers to the consolidation of assets and liabilities of affiliated entities such that the claims of all creditors in respect of the affiliated entities may be jointly satisfied. While not expressly permitted under the BIA or CCAA, Canadian Courts have relied on their equitable jurisdiction pursuant to section 183(1) of the BIA and section 13 of the CCAA to permit consolidation of corporate groups where one or more members of such corporate group are subject to insolvency or restructuring proceedings. In determining whether it is appropriate to do so, Canadian Courts look to determine whether the benefits of such consolidation outweigh the costs on a case-by-case basis with a view to the most efficient proceedings the preservation of assets. Canadian Courts will consider the following factors in determining whether it is appropriate to substantively consolidate companies for the purposes of insolvency or restructuring proceedings:

    i) difficulty in segregating assets;

    ii) presence of consolidated financial statements;

    iii) profitability of consolidation at a single location;

    iv) commingling of assets and business functions;

    v) unity of interests in ownership;

    vi) existence of intercorporate loan guarantees; and

    vii) transfer of assets without observance of corporate formalities.

    Canadian Courts will look to whether creditors would suffer greater prejudice in the absence of substantive consolidation than the debtors (and any objecting creditors) will suffer from its imposition. Recognizing that substantive consolidation will always threaten to prejudice the rights of creditors to some degree, Canadian courts have utilized the remedy of substantive consolidation where the possibility of economic prejudice that would result from continued corporate separateness outweighs the minimal prejudice that consolidation would cause. The underlying rationale for Canadian Courts’ use of substantive consolidation is to be fair and reasonable in the circumstances each case.

    Notwithstanding the foregoing, there has been notable reluctance on the part of Canadian Courts to substantively consolidate members of corporate groups on account of prejudicing certain creditors.

    Administrative Consolidation

    Administrative consolidation refers to the joint administration of affiliated debtor estates while the assets and liabilities of such debtors are left separate. Administrative consolidation is typically driven by efficiencies and aims to avoid the multiplicity of proceedings while seeking the most expeditious and least expensive determination of claims.

    Neither the BIA nor the CCAA prohibit the administration of affiliated debtor estates by a single party, however, consistent with Canadian Courts’ utilization of the doctrine of substantive consolidation, Courts rely on their equitable jurisdiction pursuant to Canadian insolvency statutes to order the consolidation of debtor estates for administration purposes, as appropriate. As is the case with the doctrine of substantive consolidation, Courts seek to balance the benefits and costs of administrative consolidation in light of the various stakeholders in determining whether it is appropriate to order such consolidation.

  19. Is it a debtor or creditor friendly jurisdiction?

    In the context of a bankruptcy, Canada is understood to be a secured creditor-friendly jurisdiction. Secured creditors are not affected by the stay of proceedings in a bankruptcy. Provided that secured creditors comply with any legal requirements as applicable under provincial law, secured creditors are permitted to realize on their security notwithstanding a bankruptcy.

    In a restructuring, however, Canada is generally seen as being more debtor-friendly. The claims of secured creditors are also stayed. Debtors may obtain interim financing and the creation of various prior ranking restructuring charges (such as a DIP Charge, a D&O Charge, a Key Employee Retention Charge, etc.), which provide debtors with significant resources in order to effect a restructuring. The CCAA, in particular, does not provide for a maximum duration of the Court ordered stay of proceedings, thereby providing the debtor with the ability to maintain control of the reorganization process. Under both the BIA and the CCAA, the debtor may also terminate agreements more easily than its counterparts to such agreements. Although the BIA and the jurisprudence under CCAA provide for checks and balances between the debtor’s and the creditors’ rights, when in doubt, Courts will generally favour the debtor if it will increase the likelihood of the debtor’s restructuring being successful, even if it could negatively affect the rights of creditors.

    On balance, it is safe to regard Canada as a secured creditor-friendly jurisdiction and recent Canadian jurisprudence, including the decision in Romspen Investment Corporation v Atlas Healthcare (Richmond Hill) Ltd. et al, continues to support this notion. In Romspen, where stakeholders had sought two competing applications – a receivership application brought by secured creditors seeking, inter alia, the the appointment of a receiver in respect of all of the undertaking, assets and properties of the debtors, and a CCAA application brought by certain entities related to the debtor seeking, inter alia, an initial stay of proceedings in respect of the debtor and the approval of a proposed debtor-in-possession credit facility – the court sided wth secured creditors in granting the receivership application finding it just and convenient to do so in light of the various factors surrounding the competing applications.

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    Certain sociopolitical factors – namely, employee benefit and pension plans – have been afforded greater attention and protection in recent years within Canadian insolvency jurisprudence. This is consistent with the growing global trend for greater awareness of certain sociopolitical factors within the insolvency context. In Ontario, this trend is evident, in part, through the increased role that regulators such as the Financial Services Commission of Ontario and other stakeholders have been afforded in insolvency proceedings in order to advocate on behalf of former employees and pensioners of debtor companies.

    While both the federal and provincial governments maintain fairly limited involvement in relation to distressed businesses – particularly in connection with larger restructurings – certain Crown corporations including Export Development Canada, Business Development Bank of Canada and Investissement Québec have mandates to assist debtors in their restructurings.

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    One of the greatest barriers to efficient and effective restructurings and insolvencies in Canada are costs, especially with respect to restructurings and liquidations under the CCAA.

    Since the CCAA involves a considerable amount of Court discretion during the course of a CCAA proceeding rather than statutory instructions, as discussed above, court attendances can be frequent. The fees and expenses of the Monitor in a CCAA restructuring, as well as the fees and expenses of the Monitor’s legal counsel, must be borne by the estate and may be substantial, especially in large, complex, and long-lasting CCAA restructurings/liquidations. Finally, the relatively recent openness of Canadian Courts to (i) ordering the formation of “creditor committees” and (ii) ordering that the legal expenses of other court-appointed representatives (and their legal counsel) be paid by the debtor’s estate also significantly increase the costs of CCAA restructurings/liquidations. The increased likelihood of prohibitive costs underlie the reason why the CCAA, as discussed above, is, in practice, almost exclusively used for the restructuring/liquidation of large corporate debtors. Canadian Courts are becoming more technologically adapted and it maybe possible for Courts to reduce the costs associated with insolvency/restructuring proceedings by permitting, for example, that hearings be conducted via videoconferencing, which has been implemented in certain instances and is being encouraged by the Ontario Superior Court of Justice (Commercial List) on a case-by-case basis for unopposed matters that would be heard “in Chambers”.

    There are currently no ongoing or foreseeable reform of the Canadian insolvency and restructuring statutes. The latest major reform of the BIA, the CCAA and the WURA dates back to 2009.