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[BANKRUPTCY, INSOLVENCY & REHABILITATION PROCEEDINGS IN CANADA]
members who benefit. Directors and officers will usually insist on these in return for avoiding mass resignations during the reorganisation of
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 as 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 of 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 wherein the valuable assets are transferred to the court approved buyer with secured interests being vested out.
the insolvent entity. Procedural Changes
Stays of proceedings will be granted in CCAA proceedings if "reasonably necessary" for the continued operations of the debtor companies. The initial stay period was reduced from 30 days to 10 days. As well, other initial relief in first day orders will only be granted if "reasonably necessary." These amendments will help ensure that orders granted at the commencement of 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
ILN Restructuring & Insolvency Group – Bankruptcy, Insolvency & Rehabilitation Series
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