This received a 27/28 in my OAC law class so, have a blast… WHEN FILING FOR BANKRUPTCY IN CANADA The law sometimes seems to pervade all aspects of our lives and an involvement with bankruptcy and insolvency law has proved to be almost unavoidable for businesspeople in Canada during the 1990’s. In simplest term, corporate and individual bankruptcy law provides a set of rules to prevent chaos among the creditors of an insolvent corporation or individual. The legislation is a complex in part because those creditors fall into so many categories-secured creditors, unsecured creditors, government creditors, and so on-each with its own special rights and interests in the bankruptcy process. Canada’s federal bankruptcy statute, the Bankruptcy and Insolvency Act, also deals with corporate receivership. A receivership is not the same as a bankruptcy.
By the same token, a receiver is not the same as a trustee in a bankruptcy. However, the two systems have a lot in common and a receivership of an individual or a corporation usually occurs at the same time as a bankruptcy. Corporations that have become insolvent can try to avoid bankruptcy and receivership by reorganizing their finances. The Bankruptcy and Insolvency Act deals with reorganizations and another federal statute, the Companies’ Creditors Arrangement Act, may offer relief to some corporations. Some of Canada’s biggest news stories of the past few years have concerned the attempts of major Canadian companies such as Olympia & York, Algoma Steel, Grafton Fraser, Woodward’s, We star Mining, and Birks, to complete reorganizations. But the most well known companies were both Air Canada and Canadian Airlines.
Air Canada, Canadian Airlines, and United Airlines are all commercial passenger air carriers. Beyond that, they have only a few similarities. All are old commercial carriers that were facing bankruptcy together until the Canadian Postal Service approved air travel for Canadian Mail in 1925. There, they reached a point of divergence that continues today. AIR CANADA Time Magazine’s November 17, 1958 cover sported a diagonal banner across one corner reading ‘Jets Across Canada.’ (Goutierez, 1997). At the time of the article’s publication, ‘Air Canada had earned a reputation as an industry leader, and this, coupled with the high-profile leadership of ‘Mr.
C. R. ,’ made Air Canada’s imminent transcontinental jet service the catalyst for an exciting new era. Time wrote that although Pan Am had already flown jets across the Atlantic, C. R. Smith and Air Canada would usher in the ‘Jet Age’ for most Canadians with the introduction of Boeing 707’s on Transco n routes’ (Goutierez, 1997).
CEO Smith often said that his own typewriter was ‘the most important piece of equipment Air Canada owns’ (Goutierez, 1997). Likely, he would barely recognize the company today. The Time article reported that with Air Canada’s new fast plane would come sweeping changes in the transport of both people and things, and that Air Canada was working with IBM ‘on an electronic system that can transmit information on every Air Canada flight across the U. S. and Canada, enabling clerks to tell instantly which seats are free.’ Air Canada called its new system the ‘Semi-Automated Business Research Environment’ – SABRE’ (Goutierez, 1997).
When A. C sought to develop further firsts for the airline industry, baggage handling came under scrutiny. There were plans for automated handling of luggage destined for a common city, but the system proved to be too cumbersome for use on narrow-bodied jets. A Canadian executive had complained ”Right now, we ” re still loading baggage on planes the same way they loaded Cleopatra’s barge.’ But containers proved impractical for narrow bodied jets, so thirty-seven years later, we ” re still loading narrow bodies like Cleopatra’s barge’ (Goutierez, 1997), and so are all the other airlines. If United’s pilots are exhibiting greed in attempting to reject their current contract as owners, then it was the Air Canada pilots they used as their role models. The highest paid pilots in the industry, they took 4 percent pay raises during the entire time in the 1991-93 period when the entire industry was suffering, but ‘Air Canada was hemorrhaging money…
having refused to ‘share the pain’ on the downside, they now expect to ‘share the gain’ on the upside’ (Flint, 1997; p. 5). As at other airlines, the pilot union is separate from the other employees of the company, and those others consistently disparage the actions of the pilots. All the other employees not only did not receive increases during the tough times, they also accepted pay cuts. Still, during 1997, Air Canada was able to generate nearly $18.
5 billion, an increase of 4. 6 percent over 1996 (web). Canadian Airlines Currently the country’s third-largest airline in terms of total revenue, Canadian Airlines is headquartered in Vancouver and has more than 63, 000 employees worldwide. All of the major airlines suffered nearly crippling losses in the early 1990 s, and Canadian was no exception. The company has only recently returned to profitability, but reported a nearly flat annual growth rate for the fiscal year ended June, 1997, for total revenues of $13, 590, 000.
Until the fall of 1996, Canadian Airlines stock value growth had been flat as the company searched for reasons and resolutions concerning this major issue which faces this corporation. One resolution could be the reorganization of finances. Canada went more than 40 years with essentially the same federal Bankruptcy Act. The statute became badly outdated, and successive governments attempted bankruptcy reform to some degree or other. However, the subject was never a burning political issue, and each time a process died. Finally, in November 1992, the Bankruptcy and Insolvency Act became the law.
It brought a host of changes to the following areas of the BIA Act. Changes to corporate reorganizations. Under the old Bankruptcy Act, it was almost impossible for companies to reorganize. The new legislation has tried to add new life to reconstructing efforts under this statute. Changes to secures creditors and receivers. Before the BIA, when a bank wanted to enforce security against a corporate borrower it would usually call the loan in its own way and appoint a receiver.
To the extent that the process was regulated, it was essentially a matter of provincial law, and many people felt it was not regulated very thoroughly. Now the federal Bankruptcy and Insolvency Act regulates both the manner in which the loan is called and the receivership process. Changes in government claims. Many government liabilities can arise out of the day to day operation of a business. Prior to the 1992 bankruptcy reform, these government claims enjoyed a sweeping preferred status, which tended to mean that the other creditors recovered little or none of the debt owed to them, on a corporate bankruptcy. There was a general feeling that this situation was unfair, and the Bankruptcy and Insolvency Act has largely redressed the imbalance by downgrading government claims (other than a few claims, including relating to income tax, Canada Pension Plan and Unemployment Insurance withholding’s) to ordinary status.
Changes were also brought about in the Environmental legislation. In the decade before bankruptcy reform, the federal and provincial governments expanded the scope of their environmental protection legislation. One of the results was that anyone who had control over a property with an environmental problem could be held liable for the cost of fixing the problem, even if they are not the ones who had caused it. Such persons could include receivers and the banks and other lenders who appoint them, as well as trustees in bankruptcy. The situation reached the stage where no trustee in bankruptcy would assume responsibility for two large insolvent companies in British Columbia and Quebec because the companies’ assets included environmentally hazardous property. The Bankruptcy and Insolvency Act introduced a modest degree of protection for trustees in bankruptcy but not for receivers.
The Act protects trustees from liability for any environmental condition or damage occurring before or after their appointment ‘except where the condition arose or the damage occurred as a result of the trustee’s failure to exercise due diligence by investigating whether an environmental problem has occurred or occurring (e. g. determining if a pollutant is being discharged into a river) at the time of accepting the appointment. The trustee must also continue to show due diligence during the term of the appointment in order to continue to enjoy protection under the Act. The last change was brought about in the Unpaid suppliers area. Under the old Bankruptcy Act, many trade suppliers received little or no recovery on a corporate bankruptcy or receivership due to the abundance of claims that used to be accorded a status superior to that of trade suppliers.
Legislators become particularly concerned about suppliers who were unpaid even though the product was supplied days before the bankruptcy or receivership occurred. The Bankruptcy and Insolvency Act introduced a right for suppliers who ship product to a company that becomes bankrupt or subject to a receivership within 30 days. Essentially, the remedy is a right to reclaim the product. Unfortunately, the conditions that have to be satisfied in order for suppliers to exercise this right are so complicated that in practice the right is often available.
There are many legalities involved when filing for bankruptcy. These are the legal steps to follow when doing so: More than 90 percent of bankruptcy proceedings are reportedly voluntary. They are initiated by the debtor, who files a petition with the appropriate federal court. A bankruptcy trustee then collects and liquidates the debtor’s nonexempt property for the benefit of the unsecured creditors. Secured creditors are not affected by bankruptcy liquidation’s because they have taken collateral (such as a home mortgage) to ensure repayment of debts.
Once distribution to unsecured creditors occurs, the court discharges the debtor unless that person’s prior behavior justifies denying the discharge or granting it with certain specific statutory exceptions. In order to limit or deny the discharge, the creditor must prove that the debtor has obtained credit by fraudulent practices or has engaged in other prohibited behavior. Creditors can file an involuntary bankruptcy petition against a debtor, alleging that the debtor is ‘generally not paying’ debts, but this type of proceeding rarely occurs. The Bankruptcy and Insolvency Act allows both consumer and business debtors to attempt financial reorganization instead of liquidation of nonexempt assets. A debtor who selects this alternative proposes a reorganization plan for consideration by the affected creditors and the court. For individuals who use Chapter 13 reorganization proceedings, a typical plan requires payment from the debtor’s future income.
Businesses that wish to continue their operations, sometimes in a modified form, usually opt for Chapter 11 reorganization proceedings. Their proposals may combine payments from sales of some business assets with income from future business operations. Stockholder interests may be restructured in addition to modifying payment requirements for their secured and unsecured debts which are still withstanding. The rules which the legislature have set are only there for the benefit of others, not for the bankrupt or insolvent individual or corporation. Although, they do outline the proper procedure that one should take in order to and when filing for bankruptcy. Those laws can be found in the Bankruptcy and Insolvency Act (BIA).
This just goes to show you that the law does indeed pervade all aspects of our lives and an involvement with bankruptcy and insolvency law has proved to be almost unavoidable for business people in Canada in this day and age.