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[BANKRUPTCY, INSOLVENCY & REHABILITATION PROCEEDINGS IN CANADA]
insolvency do not over-reach and are fair to other creditor interests. Certain relief like new funding (DIP financing orders) and pre-baked solicitation proceedings for the sale of assets, which may prejudice stakeholders who had no notice of insolvency proceedings, may now be challenged earlier. Statutory Duty of Good Faith In Bhasin v Hrynew , the Supreme Court recognized a general duty of honest performance in contractual dealings which has been broadly applied. Canadian courts must now consider good faith and disclosure of economic interests to enhance their jurisdiction in restructuring matters. Parliamentary debates preceding the amendments suggest that they were intended to protect the public from the effects of high-profile corporate bankruptcies like Nortel and Sears where many Canadian employees lost their pensions. A statutory duty to act in good faith will now apply to all participants in Canadian insolvency proceedings. Although debtors previously had a duty to act in good faith, the statutory duty now applies to all parties. This amendment is consistent with developments in the common law. In Century Services Inc v Canada (Attorney General) the Supreme Court of Canada stated that "the requirements of appropriateness, good faith and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority". A statutory duty of good faith is also consistent with British and American insolvency statutes and will therefore be useful in cross-border proceedings. No Equitable Subordination in Canada, so Far The doctrine of equitable subordination is an American legal doctrine that allows a court to subordinate a creditor's claim and ranking in an insolvency proceeding where that creditor has acted badly, in the determination of the court. Canadian courts have resisted its application
over an extended period of time in numerous insolvency proceedings. However, it remains an attractive equitable doctrine to be applied as a potential course of redress. Recent statutory implementation of the duty of good faith in Canada appears to have provided another reason to not apply this doctrine in Canadian proceedings to address the bad behavior of certain creditors. However, this doctrine has not yet been definitively shut off by the highest Canadian courts either, to date. Reverse Vesting Orders There have been recent developments in the case law regarding the use of reverse vesting orders ( "RVO" ) as a means of providing court approval to certain transactions to be effected in the context of an insolvency proceeding. Through the use of a reverse vesting order, the court may transfer liabilities or undesired assets "out of" the debtor company and "into" a new company or other available existing subsidiary entity. The impact is to "cleanse" the debtor problematic assets or liabilities so as to effect a new state of affairs in assistance of the restructuring. This is a "reverse" to the approach of the traditional approval and vesting order where in the valuable assets are transferred to the court approved buyer with secured interests being vested out. Of particular in note, in Harte Gold Corp. Re , the Ontario Superior Court provided some important new guidance on what questions the court should investigate when asked to approve a RVO: (1) Why is the RVO necessary in this case? (2) Does the RVO structure produce an economic result at least as favourable as any other viable alternative? (3) Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative? (4) Does the consideration being paid for the debtor's business reflect the importance and value of the licenses and permits (or other intangible assets) being preserved under the
ILN Restructuring & Insolvency Group – Bankruptcy, Insolvency & Rehabilitation Series
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