CHAPTER 7 Insolvency and Bankruptcy Considerations in Canada
| Jurisdiction | United States |
CHAPTER 7 Insolvency and Bankruptcy Considerations in Canada
Canada and the United States are each other's largest trading part-ners.553 With economies that are joined at the hip, financial downturns in one jurisdiction impact stakeholders in both. Given the close integration of the two economies, most Canadian restructurings and insolvencies have cross-border implications. This is particularly true in the automotive sector, where this integration is even more pervasive.
The following sections explore:
• an overview of the Canadian legal system;
• cross-border integration within the automotive sector; and
• insolvency proceedings in the automotive sector, in particular:
? restructuring proceedings under the Companies' Creditors Arrangement Act, (CCAA);554
? receivership proceedings; and
? cross-border restructuring proceedings.
A. Overview of the Canadian Legal System555
1. Jurisdiction
Canada is a federal state comprising 11jurisdictions: the federal government and 10 provinces.556 The Canadian Constitution557 allocates jurisdiction over various subject matters between the federal and provincial jurisdictions. "Bankruptcy and Insolvency" is exclusively within the federal jurisdiction.558 "Property and Civil Rights" are exclusively within the jurisdiction of the prov-inces.559 The laws concerning "Property and Civil Rights" (contract law, tort law, real property law, trusts) in all provinces, except for Quebec, evolved from the British Common Law. American law shares the same origin. Accordingly, in general Canada's fundamental legal concepts with respect to contract law, property law and the like are similar to those of the United States. Conversely, "Property and Civil Rights" in the Province of Quebec evolved from the Civil Law of France. Accordingly, Americans doing business in the Province of Quebec will find fewer similarities to American law.
Although matters dealing with "Bankruptcy and Insolvency" are exclusively within the federal jurisdiction, those laws are overlaid on provincial law with respect to matters such as contracts and real property. Therefore, insolvency cases in Canada involve a hybrid of federal and provincial laws. Accordingly, there will be nuanced differences in an insolvency case between individual common law provinces and more material differences with respect to insolvency cases in the Province of Quebec.
2. The Canadian Court System
Each province has a Superior Court.560 The judges of these courts are federally appointed but the courts themselves are administered by each province, which also has its own Court of Appeal. Appeals from each provincial Court of Appeal are to the Supreme Court of Canada. There is no higher court. There are also specialized federal courts dealing with matters such as taxation, patents and trademarks. This chapter only deals with courts that would be encountered in commercial and insolvency cases.
Major Canadian centers such as Toronto, Montreal, Calgary and Vancouver have developed "commercial courts" within the Superior Court system. These courts comprise specialized judges experienced in commercial matters. In addition, these courts are extremely "user friendly." They are able to rapidly react to and accommodate "real time" litigation, which is common in insolvency cases.
B. Cross-Border Integration within the Automotive Sector
The Canadian and American automotive sectors are highly integrated due to a number of converging factors.
1. Geography
Economist James Laxer points out, "For over a century, Ontario has prospered as a consequence of the location in its cities of an automotive industry, large enough to be globally significant. From the eastern edge of the Golden Horseshoe four hundred kilometres westward to Windsor; Southern Ontario is home to over half of Canada's manufacturing and an even higher proportion of the nation's heavy manufacturing. The jewel in the crown of Ontario manufacturing, which includes steel, chemicals and electronics as well, is the auto industry. Directly and indirectly, hundreds of thousands of jobs in Ontario are linked to the auto industry. Southern Ontario has all the locational advantages, as an auto producer, of Detroit and the American Midwest. Ontario's automotive industry has benefited from much in addition to its proximity to markets."561
2. Free Trade Legislation
In 1965, the Canada/U.S. Auto Pact came into force. It allowed the Big Three automakers and the producers of original auto parts (parts included in the vehicles at the time of purchase) to ship their products duty-free in either direction across the Canada/U.S. border provided that certain commitments were met.562 In 1989, the Canada/U.S. Free Trade Agreement came into effect, followed in 1994 by the North American Free Trade Agreement, which included Mexico. The Auto Pact was a sectoral trade deal. The Free Trade Agreement and North American Free Trade Agreement are broader-based free-trade agreements.563 The combined effect of this legislation allows tariff-free trade between Canada and the U.S. in the automotive sector.
3. The Canadian Dollar and Canadian Health Care
When the Auto Pact came into force, the Canadian and U.S. dollar were roughly equivalent. However, starting in the mid 1970s, the value of the Canadian dollar had slid significantly against the U.S. dollar. Accordingly, the labor costs for automotive manufacturers were less in Canada. Coupled with state-provided health care, the cost of labor in Canada was highly competi-tive.564 These economic advantages allowed the Canadian automotive sector to expand and become an integral source of supply to the U.S. sector.
In 2007 and 2008, the aforementioned economic benefits were wiped out by a perfect storm of converging economic forces. The value of the Canadian dollar rose dramatically to be at par or above par with the U.S. dollar.
This eliminated the labor cost advantage that Canadian manufacturers had enjoyed since the 1970s. In addition, the price of gasoline increased significantly, depressing auto sales. Lastly, the economic crisis of 2007 and 2008 that rocked the North American economy resulted in the U.S. insolvency proceedings of General Motors and Chrysler.565 The Canadian subsidiaries of General Motors and Chrysler did not file insolvency proceedings in Canada due in large part to the financial assistance provided by the Canadian Federal Government and the Province of Ontario.566
4. Result of Integration
As a result of the high degree of integration in the Canada/U.S. auto sector, concepts such as "single-source supplier," "just-in-time inventory," "Accommodation Agreements" and "Access Agreements" are the same in Canada as in the U.S. As previously noted, Canadian and American legal concepts are also similar given their joint origin in English Common Law. Accordingly, the portions of this book dealing generally with American legal concepts and explaining practices in the automotive sector are similar to Canadian law and practice.
C. Insolvency Proceedings in the Automotive Sector, Particularly CCAA and Receivership Proceedings
While there are many similarities between the Canadian and U.S. insolvency and restructuring systems, there are some material differences in approach and process that must be appreciated in order to understand the Canadian insolvency and restructuring landscape. In certain cases, the same words in each system have quite different meanings or nuances. As a basic example, in Canada "bankruptcy" means a chapter 7-type liquidation proceeding, while in the U.S. it includes liquidation and restructuring proceedings—both chapter 7 and chapter 11.
As in the U.S., insolvency laws in Canada deal with both restructurings and liquidations. In Canada, there are two primary statutes governing the restructuring of insolvent businesses: the CCAA and Part III of the Bankruptcy and Insolvency Act567 (BIA Proposals). On the liquidation side, there are two processes that may be applied: a bankruptcy under the BIA and receivership.568
Financially impaired companies in the automotive sector are most often involved in CCAA restructuring proceedings or in receiverships. In this chapter, we will provide an overview of CCAA restructuring proceedings and receiverships with a case example for each.
1 . CCAA Restructuring Proceedings
As noted above, there are two regimes that may come into play with respect to restructuring insolvent companies in Canada: the CCAA and BIA Proposals. Generally, the CCAA is used for restructuring more complex companies, while BIA Proposals are used for smaller or less-complicated filings. Both regimes provide for a "debtor in possession" restructuring under the supervision of the court.569 Recent amendments to BIA Proposal provisions now provide a wider scope to the BIA Proposals and increase their utility in more complex situations; however, the CCAA will undoubtedly remain the process of choice in more complex filings. The underlying principles and processes of restructurings under the CCAA and BIA Proposals are similar. The differences are technical and involve strategic considerations. Accordingly, for simplicity, this chapter will only deal with restructurings under the CCAA.
2. Overview of the CCAA
A restructuring under the CCAA is a uniquely Canadian process. The CCAA was enacted during the Great Depression and was used to restructure large companies with complex financial structures.570 In essence, the CCAA provides a general framework for restructuring that includes a stay of proceedings to permit the debtor to file a plan of compromise or arrangement with its creditors. Beyond the general framework, the CCAA has very few statutory rules compared to the U.S. Bankruptcy Code. This leaves a tremendous amount of discretion in the hands of the court supervising the restructuring. The CCAA was dormant for several decades until it was resurrected in the 1980s by innovative counsel who realized that the CCAA provides a flexible tool to restructure...
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