Commercial insolvency in Canada

Commercial insolvency in Canada has options and procedures that are distinct from those available in consumer insolvency proceedings. It is governed by the following statutes:

The following discussion concentrates on insolvency as it applies to corporations, but the rules apply to individuals and other entities involved in commercial matters as well, with necessary modifications.

Provincial legislation under the property and civil rights power of the Constitution Act, 1867 regulates the resolution of financial difficulties that occur before the onset of insolvency, and the BIA incorporates many of them by reference in the application of its provisions. Notable legislation is in effect for governing:

As well, corporate directors have a statutory duty of loyalty to the corporation and a duty of care to all of its stakeholders. It follows that directors have a duty to ensure that their corporation carries on business only if it can meet its liabilities as they become due and if there is a reasonable expectation of newly incurred obligations being satisfied.

Where a commercial debtor is experiencing financial difficulties, it is generally in his best interests to work with the secured lenders. The following options may be considered in order to seek a resolution to the matter:

All options other than the first four have the effect of staying any proceedings that can be brought against the debtor.

Insolvent persons have the choice of making an assignment immediately, or to seek protection from creditors in order to reorganize their affairs and continue as a going concern. For the latter option, companies owing less than $5 million generally opt to file a Division I proposal, while those owing more can also opt for the CCAA proceeding.

With certain exceptions, the BIA covers a wide range of entities:

The CCAA covers insolvent companies (together with their affiliates) with debts greater than $5 million.

The Winding-Up and Restructuring Act, in addition to its application to financial institutions, also offers a little-used alternative to the BIA for certain groups of insolvent companies.

The trustee/receiver/monitor must first realize the amount of the proceeds from the property that is available for payment to the different classes of creditors, and different rules apply according to the type of proceeding. They are summarized as follows:

The estate is then settled, using the priority of claims outlined in the BIA.

It is in the lender's or supplier's best interest to minimize his financial exposure should his client experience financial difficulties. To that end, there is a range of remedies available to establish his status as a secured (vs unsecured) creditor under both provincial and federal legislation.

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