Bill C-12: Clause by Clause Analysis — Clauses 41-50

An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005


Amendments to the Bankruptcy and Insolvency Act demonstrating Clauses of Bill C-12
Amendments to the Bankruptcy and Insolvency Act (BIA) Clauses of Bill C-12 Sections
Title 41 s.91
Preferences 42 s.95(1) to (2.1)
Transfers at Undervalue 43 s.96
Application of Anti-Abuse Mechanisms to Proposals 44 s.101.1
Vote of Creditors not Dealing at Arm's Length 45 s.109(6)
Voting 46 s.115.1
Claim of Present or Former Spouse or Common-Law Partner 47 s.137(2)
Postponement of Wage Claims of Relatives 48 s.138
Postponement of Equity Claims 49 s.140.1
Application of Provincial Law to Lessors' Rights 50 s.146

Bill Clause No. 41
Section No. BIA s.91
Topic: Title

Proposed Wording

Preferences and Transfers at Undervalue

Rationale

The amendment adds the concept of "transfers at undervalue" to the title preceding section 96.1 of the Act.

Present Law

As enacted by Chapter 47, Clause 71:

Preferences (Title)

Bill Clause No. 42
Section No. BIA s.95(1) to (2.1)
Topic: Preferences

Proposed Wording

95.(1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person

  • (a) in favour of a creditor who is dealing at arm's length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and
  • (b) in favour of a creditor who is not dealing at arm's length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.

(2) If the transfer, charge, payment, obligation or judicial proceeding referred to in paragraph (1)(a) has the effect of giving the creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made, incurred, taken or suffered with a view to giving the creditor the preference — even if it was made, incurred, taken or suffered, as the case may be, under pressure — and evidence of pressure is not admissible to support the transaction.

(2.1) Subsection (2) does not apply, and the parties are deemed to be dealing with each other at arm's length, in respect of the following:

  • (a) a margin deposit made by a clearing member with a clearing house; or
  • (b) a transfer, charge or payment made in connection with financial collateral and in accordance with the provisions of an eligible financial contract.

Rationale

Chapter 47 was intended to introduce improvements to the preferences provisions in the BIA. Due to a drafting error, the amendments were not included in the legislation. The situation is corrected by this amendment.

The amendment changes the treatment of payments made to non-arm's-length parties that have the effect of creating a preference. Now, preferences in favour of non-arm's-length parties are deemed to be fraudulent and void as against the trustee. The treatment of payments to arm's-length parties is not affected.

Subsection (1) puts forward the different treatment for arm's-length and non-arm's-length parties. In paragraph (a), if the debtor enters into a transaction with an arm's-length creditor with the view to giving that creditor a preference, the transaction is void as against the trustee. By comparison, in paragraph (b), if the debtor enters into a transaction with a non-arm's-length creditor that has the effect of giving that creditor a preference, the transaction is void as against the trustee. The requirement of intent to create a preference is removed for non-arm's-length parties.

Subsection (2) reflects the current BIA.

An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007, which obtained Royal Assent on June 22, 2007 added paragraph (b). Subclause 112(14) coordinates Chapter 29 and this Act such that the coming into force of this Act does not inadvertently repeal paragraph (b).

Present Law

Bankruptcy and Insolvency Act:

95.(1) Every transfer of property, every charge made on property, every payment made, every obligation incurred and every judicial proceeding taken or suffered by any insolvent person in favour of any creditor or of any person in trust for any creditor with a view to giving that creditor a preference over the other creditors is, when it is made, given, incurred, taken or suffered within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date the insolvent person became bankrupt, both dates included, deemed fraudulent and void as against, or in the Province of Quebec, may not be set up against, the trustee in the bankruptcy.

(2) If any transfer, charge, payment, obligation or judicial proceeding mentioned in subsection (1) has the effect of giving any creditor a preference over other creditors, or over any one or more of them, it shall be presumed, in the absence of evidence to the contrary, to have been made, incurred, taken, paid or suffered with a view to giving the creditor a preference over other creditors, whether or not it was made voluntarily or under pressure and evidence of pressure shall not be admissible to support the transaction.

(2.1) Subsection (2) does not apply, and the parties are deemed to be dealing with each other at arm's length, in respect of the following:

  • (a) a margin deposit made by a clearing member with a clearing house; or
  • (b) a transfer, charge or payment made in connection with financial collateral and in accordance with the provisions of an eligible financial contract.
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Bill Clause No. 43
Section No. BIA s.96
Topic: Transfers at Undervalue

Proposed Wording

96.(1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if

  • (a) the party was dealing at arm's length with the debtor and
    • (i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,
    • (ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
    • (iii) the debtor intended to defraud, defeat or delay a creditor; or
  • (b) the party was not dealing at arm's length with the debtor and
    • (i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
    • (ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
      • (A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
      • (B) the debtor intended to defraud, defeat or delay a creditor.

(2) In making the application referred to in this section, the trustee shall state what, in the trustee's opinion, was the fair market value of the property or services and what, in the trustee's opinion, was the value of the actual consideration given or received by the debtor, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.

(3) In this section, a "person who is privy" means a person who is not dealing at arm's length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person.

Rationale

The transfer at undervalue provision is an anti-abuse mechanism intended to assist the trustee in recovering assets that the debtor disposed of in advance of bankruptcy for little or no consideration, thereby depriving the estate of value that would have otherwise been available for distribution to the creditors.

The amendments are intended to correct problems in the drafting of Chapter 47 that left significant loopholes that could be exploited by strategic bankrupts.

Subsection (1) is amended to clarify that a court may declare the transfer as void as against the trustee or, in the alternative, the court may allow the transfer to stand but order that the party that received a benefit from the transfer pay an equivalent value into the estate.

Paragraphs (a) and (b) are amended to clarify that the debtor may have intended to defraud, defeat or delay the creditors. Only referring to "defeat" is more limiting than was intended under Chapter 47.

Subsection (3) is added to provide better clarity for the meaning of "person who is privy" to the transfer.

Present Law

As enacted by Chapter 47, Clause 73:

96. If the transfer, charge, payment, obligation or judicial proceeding referred to in section 95 has the effect of giving a creditor who is not at arm's length a preference over other creditors, the period referred to in subsection 95(1) is one year instead of three months.

96.1(1) If a debtor has entered into a transaction with another party, the court may, on the application of the trustee, inquire into whether the transaction was a transfer at undervalue and whether or not the other party was at arm's length with the debtor.

(2) If the court finds that the other party in the transaction was at arm's length with the debtor and that the transaction was a transfer at undervalue, the court may give judgment to the trustee against the other party to the transaction, against any other person being privy to the transaction with the debtor or against all those persons for the difference between the actual consideration given or received by the debtor and the fair market value, as determined by the court, of the property or services concerned in the transaction, if

  • (a) the transaction occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy; and
  • (b) the debtor was insolvent at the time of, or was rendered insolvent by, the transaction, and the debtor intended to defeat the interests of creditors.

(3) If the court finds that the other party in the transaction was not at arm's length with the debtor and that the transaction was a transfer at undervalue, the court may give judgment to the trustee against the other party to the transaction, against any other person being privy to the transaction with the debtor or against all those persons for the difference between the actual consideration given or received by the debtor and the fair market value, as determined by the court, of the property or services concerned in the transaction, if the transaction occurred during the period

  • (a) that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy; or
  • (b) that begins five years before the date of the initial bankruptcy event and that ends one day before one year before the date of the initial bankruptcy event in the case where
    • (i) the debtor was insolvent at the time of, or was rendered insolvent by, the transaction, or
    • (ii) the debtor intended to defeat the interests of creditors.

(4) In making the application referred to in this section, the trustee shall state what, in the trustee's opinion, was the fair market value of the property or services concerned in the transaction and what, in the trustee's opinion, was the value of the actual consideration given or received by the debtor in the transaction, and the values on which the court makes any finding under this section are the values so stated by the trustee unless other values are proved.

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Bill Clause No. 44
Section No. BIA s.101.1
Topic: Application of Anti-Abuse Mechanisms to Proposals

Proposed Wording

101.1(1) Sections 95 to 101 apply, with any modifications that the circumstances require, to a proposal made under Division I of Part III unless the proposal provides otherwise.

(2) For the purposes of subsection (1), a reference in sections 95 to 101

  • (a) to "date of the bankruptcy" is to be read as a reference to "day on which a notice of intention is filed" or, if a notice of intention is not filed, as a reference to "day on which a proposal is filed"; and
  • (b) to "bankrupt", "insolvent person" or "debtor" is to be read as a reference to "debtor in respect of whom the proposal is filed".

(3) If the proposal is annulled by the court under subsection 63(1) or as a result of a bankruptcy order or assignment, sections 95 to 101 apply as though the debtor became bankrupt on the date of the initial bankruptcy event.

Rationale

The amendment clarifies wording and also corrects cross-referencing to reflect changes made by Chapter 47.

In addition, the content of section 101.2 is merged into section 101.1 by adding it as subsection (3).

Present Law

Bankruptcy and Insolvency Act:

101.1(1) Where a proposal is made under Division I of Part III, sections 91 to 101 apply to the proposal, with such modifications as the circumstances require, except where the proposal otherwise provides.

(2) For the purposes of subsection (1), any reference in sections 91 to 101 to "becomes bankrupt" shall be construed as a reference to "files a notice of intention" or "files a proposal", whichever filing was done first, and any reference in those sections to a bankrupt shall be construed as a reference to the debtor in respect of whom the proposal is filed.

101.2 Sections 91 to 101 apply as though the debtor became bankrupt on the date of the initial bankruptcy event if the proposal is annulled either by the court under subsection 63(1) or as a result of a bankruptcy order or assignment.


Bill Clause No. 45
Section No. BIA s.109(6)
Topic: Vote of Creditors not Dealing at Arm's Length

Proposed Wording

109.(6) If the chair is of the opinion that the outcome of a vote was determined by the vote of a creditor who did not deal with the debtor at arm's length at any time during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy, the chair shall redetermine the outcome by excluding the creditor's vote. The redetermined outcome is the outcome of the vote unless a court, on application within 10 days after the day on which the chair redetermined the outcome of the vote, considers it appropriate to include the creditor's vote and determines another outcome.

Rationale

Subsection (6) deals with the right of non-arm's-length creditors to vote. Under the BIA, they were entitled to vote only if they held claims valued at more than 80 percent of all claims. Chapter 47 attempted to address the inequity of preventing all non-arm's length creditors from voting; however, the amendment failed to provide the court with guidance as to when it should allow a non-arm's-length creditor to vote. This amendment clarifies that the court has the discretion to take all circumstances into account and determine if it is appropriate to include the non-arm's-length creditor's vote.

Present Law

As enacted by Chapter 47, Clause 80(2):

109.(6) If, in respect of the vote on any particular matter at a meeting of creditors, the chair is of the opinion that the outcome of the vote was determined by the vote of a person who did not deal with the debtor at arm's length at any time within the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy, the chair shall redetermine the outcome of the vote by not including the votes of all such creditors, and that new outcome, as redetermined by the chair, is the outcome of the vote, unless an application is made to the court within 10 days by one of the creditors whose vote was not included and the court, if it decides to include the vote of the applicant, determines another outcome for the vote.

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Bill Clause No. 46
Section No. BIA s.115.1
Topic: Voting

Proposed Wording

115.1 In an application to revoke or vary a decision that affects or could affect the outcome of a vote, the court may make any order that it considers appropriate, including one that suspends the effect of the vote until the application is determined and one that redetermines the outcome of the vote.

Rationale

At a meeting of creditors, the chairperson may admit or reject a proof of claim for the purpose of voting. While the decision may be appealed, this may be ineffective if the vote is taken before the appeal can be heard. There may be no way to unwind an action taken on the basis of the contested vote.

The amendment is intended to clarify that a court may suspend the result of the vote and order that the vote be recounted so that it includes the initially rejected claims. This will create greater efficiency because the creditors' meeting will not need to be adjourned until after the court determination. Rather, the vote can occur with the aggrieved creditor entitled to request the court to suspend the effect of the vote. In addition, the court will have the ability to redetermine the outcome of the vote, meaning that a new creditors' meeting will not be required to hold the vote again.

Present Law

None.


Bill Clause No. 47
Section No. BIA s.137(2)
Topic: Claim of Present or Former Spouse or Common-Law Partner

Proposed Wording

Subsection 137(2) of the Act is repealed.

Rationale

Subsection 137(2) prevents a spouse or common-law partner of the bankrupt from claiming a dividend for wages until all other creditors are paid. The subsection is repealed due to concerns that it unfairly targets spouses and former spouses regardless of the circumstances.

The repeal of subsection (2) is balanced by subsection (1), which provides that non-arm's-length creditors may not claim a dividend. Subsection (1), however, provides the creditor with an opportunity to show that the transaction, despite the non-arm's-length relationship, is proper.

Present Law

Bankruptcy and Insolvency Act:

137.(2) A spouse or common-law partner, or former spouse or common-law partner, of a bankrupt is not entitled to claim a dividend in respect of wages, salary, commission or compensation for work done or services rendered in connection with the trade or business of the bankrupt until all claims of the other creditors have been satisfied.


Bill Clause No. 48
Section No. BIA s.138
Topic: Postponement of Wage Claims of Relatives

Proposed Wording

Section 138 of the Act is repealed.

Rationale

Section 138 prevents a listed family member of the bankrupt from applying the section 138 preferred claim for wages. The subsection is repealed due to concerns that it unfairly targets specific family members regardless of the circumstances.

The repeal of section 138 is balanced by section 137, which provides that non-arm's-length creditors may not claim a dividend until all other creditors are paid. Section 137, however, provides the creditor with an opportunity to show that the transaction, despite the non-arm's-length relationship, is proper.

Present Law

Bankruptcy and Insolvency Act:

138. A father, mother, child, brother, sister, uncle or aunt, by blood, adoption, marriage or common-law partnership, of a bankrupt is not entitled to have a claim preferred as provided by section 136, in respect of wages, salary, commission or compensation for work done or services rendered to the bankrupt.


Bill Clause No. 49
Section No. BIA s.140.1
Topic: Postponement of Equity Claims

Proposed Wording

140.1 A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been satisfied.

Rationale

Section 140.1 is amended to clarify that the section applies to "equity claims." Chapter 47 did not include the defined term and, therefore, included more explanatory language.

Present Law

As enacted by Chapter 47, Clause 90:

140.1 A creditor is not entitled to claim a dividend in respect of a claim arising from the rescission of a purchase or sale of a share or unit of the bankrupt — or in respect of a claim for damages arising from the purchase or sale of a share or unit of the bankrupt — until all claims of the other creditors have been satisfied.

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Bill Clause No. 50
Section No. BIA s.146
Topic: Application of Provincial Law to Lessors' Rights

Proposed Wording

146. Subject to priority of ranking as provided by section 136 and subject to subsection 73(4) and section 84.1, the rights of lessors are to be determined according to the law of the province in which the leased premises are situated.

Rationale

Chapter 47 introduced the right for bankrupts to assign agreements, including leases. It inadvertently failed to include a cross-reference to that right in section 146. The cross-reference clarifies that lessors' rights under provincial law are subject to the right of a debtor to assign an agreement.

Present Law

Bankruptcy and Insolvency Act:

146. Subject to priority of ranking as provided by section 136 and subject to subsection 73(4), the rights of landlords shall be determined according to the laws of the province in which the leased premises are situated.