Ontario Bankruptcy and Insolvency Law — BIA, CCAA, and Creditor Remedies

Federal Jurisdiction Over Bankruptcy and Insolvency

Bankruptcy and insolvency is a federal head of power under the Constitution Act 1867 s.91(21). Canada's primary insolvency statutes are the Bankruptcy and Insolvency Act RSC 1985 c B-3 (BIA) and the Companies' Creditors Arrangement Act RSC 1985 c C-36 (CCAA). The BIA governs personal bankruptcies, consumer proposals, commercial proposals, and assignments in bankruptcy for companies with assets or liabilities below $5,000,000. The CCAA is available to insolvent companies with claims exceeding $5,000,000 and is used for major commercial restructurings.

The Ontario Superior Court of Justice has jurisdiction over both BIA proceedings (in the commercial list in Toronto and other centres) and CCAA proceedings. Licensed Insolvency Trustees (LITs) — regulated by the Office of the Superintendent of Bankruptcy Canada — administer bankruptcy estates, consumer proposals, and commercial proposals under the BIA.

Bankruptcy Process — BIA

Bankruptcy may be initiated by: (1) voluntary assignment — the debtor assigns their property to an LIT by signing a Form 76 assignment (BIA s.49); or (2) bankruptcy order — a creditor owed $1,000 or more petitions the court to make a bankruptcy order based on an act of bankruptcy (BIA s.43). An act of bankruptcy (s.42) includes: fraudulent transfer/preference; appointment of a receiver; notice of suspension of business; or failure to meet liabilities generally as they become due (insolvency).

Upon bankruptcy, the bankrupt's estate vests in the LIT as trustee. Property divisible among creditors includes all property owned by the bankrupt on the date of bankruptcy, subject to exemptions. Ontario exemptions under BIA s.67 and Ontario's Execution Act RSO 1990 c E.24 and O.Reg. 657/05 include: principal residence up to $10,000 in equity ($0 in Toronto CMA under revised regulations as of 2016); personal property exemptions of $5,650 household goods; motor vehicle up to $5,650; tools of trade up to $11,300 (certain professions higher); RRSP contributions more than 12 months before bankruptcy; life insurance designated beneficiary.

Consumer Proposals

A consumer proposal under BIA s.66.11 et seq. is available to individuals with total debts not exceeding $250,000 (excluding a mortgage on a principal residence). The debtor makes a formal offer to unsecured creditors, administered by an LIT acting as administrator. The proposal must provide a better return to creditors than bankruptcy.

Consumer proposals require acceptance by a majority in number and value of voting unsecured creditors (or are deemed accepted if no creditor requests a meeting within 45 days). Once accepted and approved by the court, a consumer proposal binds all unsecured creditors. The debtor makes payments over up to five years and, upon completion, receives a certificate of full performance discharging the proven unsecured debts. Consumer proposals do not affect secured creditors' rights against their security.

Proof of Claim

Creditors participate in a bankruptcy estate by filing a proof of claim (Form 31 — BIA s.124). The deadline is the later of 30 days before the first meeting of creditors or 30 days after the date of the bankruptcy order. Late claims may be admitted but the late claimant has no right to disturb dividends already paid.

Claims must specify the amount claimed, the nature of the debt, and any security held. Secured creditors must disclose and assign a value to their security; they may claim as unsecured for any deficiency. The LIT may disallow or reduce a claim; the creditor may appeal to the court (BIA s.135).

Fraudulent Preferences and Transactions at Undervalue

BIA Part VI (ss.91-101) contains provisions allowing the trustee to challenge pre-bankruptcy transactions that prejudice creditors:

• Fraudulent preferences (s.95): A transfer made by an insolvent debtor with intent to prefer one creditor over others, or that has the effect of giving one creditor a preference, within three months before bankruptcy (or 12 months if the preferred party is non-arm's-length). The trustee may apply to the court to void the preference.
• Settlements and transactions at undervalue (s.96): Settlements or gifts made within one year before bankruptcy (five years for non-arm's-length transactions) where the debtor received no consideration or grossly inadequate consideration may be void against the trustee. The trustee may recover the property or its value.
• Fraudulent conveyances: Ontario's Fraudulent Conveyances Act RSO 1990 c F.29 and the federal Assignments and Preferences Act RSO 1990 c A.33 also allow trustees and creditors to challenge transfers made to hinder, delay, or defraud creditors — without limitation periods for intentional fraudulent transfers.

CCAA Restructuring

The Companies' Creditors Arrangement Act (CCAA) provides a flexible framework for restructuring insolvent companies with total claims exceeding $5,000,000. CCAA proceedings are initiated by a debtor company applying to the Ontario Superior Court (Commercial List) for an initial order. The initial order typically: (1) stays all proceedings against the company (the "stay of proceedings") while restructuring is attempted; (2) appoints a Monitor — a licensed insolvency trustee who monitors the debtor's affairs and reports to the court; and (3) authorizes borrowing under a DIP (debtor-in-possession) facility with super-priority over existing claims.

The restructuring plan must be approved by creditors (two-thirds in value and a majority in number of each class of creditors voting) and sanctioned by the court. Dissenting creditors within an approving class are bound if the statutory thresholds are met and the court is satisfied the plan is fair and reasonable.

Priority of Claims

In a bankruptcy, claims are paid in order of priority under BIA s.136: (1) Costs and fees of the trustee and administration; (2) Levy under s.147; (3) Wage claims — employee wages, salaries, commissions up to $2,000 per employee (or $1,000 in certain situations) for services in the six-month period preceding bankruptcy; (4) Municipal taxes assessed in the preceding two years; (5) Landlord's preferred rental claim (three months preceding bankruptcy and three months following); (6) Costs of preservation of assets; (7) Statutory employee claims under various provincial employment legislation; (8) Unsecured creditors who have filed proofs of claim pro rata.

Secured creditors stand outside the bankruptcy estate with respect to their security — they realize on their security independently and participate in the estate only for any deficiency after realizing their security.