Saturday, December 12, 2009

Still not too late to change the Canadian Bankruptcy law

The Canadian Bankruptcy law has multiple components just as in the USA and other countries. Currently Nortel is in bankruptcy protection in Canada called the Companies Creditors Arrangement Act (CCCA) something like chapter 11 in the US. When a company moves to completely liquidate it does so under the Bankruptcy and Insolvency Act (BIA). Nortel has not yet reached that stage but will probably do so in 2010. Some people estimate that will occur around June 2010 but may happen sooner. When it happens the pension plan will be wound up, and court proceedings then address the value of the company and what gets paid to creditors. At this point, underfunded pension plans and other employee creditors are seen as unsecured and take a second place to any secured creditors or institutions with priority.

There have been attempts to change the BIA so that pension plans and other ex-employee claims have first priority. That way any underfunding would be addressed first before other creditors receive payment on their claims. The recent attempts to change that law have been voted down by the Conservative government, but that doesn't mean it can't be changed. For Nortel Canadian retirees we have to redouble our efforts to have the BIA changed to provide priority for pensioners, LTD employees, and severed employees. Make sure you understand the implications and write to your MPs, the PM, and the media to have your voice heard. See the information on the NRPC web-site and also the Canadian Pension Law web site shown on the links in the right hand column on this page.

Some More detail on what happens when a company goes bankrupt in Canada

An insolvent company is a company which is not capable of paying all of its debts. Bankruptcy is a legally declared inability of an individual or an organization to repay its creditors. In Canada, the Bankruptcy and Insolvency Act (BIA) and Companies' Creditors Arrangement Act (CCAA) are the two important laws that have been established by the federal government to deal with insolvent or bankrupt individuals and corporations. All provinces have their own bankruptcy related laws that apply only to the individuals and corporations residing or carrying out business there. Bankruptcy laws are designed to preserve the rights of both insolvent debtors and their creditors who have a financial interest at stake. They also facilitate the insolvent debtor to resolve his debts through the division of his assets among his creditors. Federally incorporated banks and insurance companies are excluded from the BIA and CCAA and are dealt with under the Federal Winding-up and Restructuring Act. The following articles discuss some of the important bankruptcy provisions in the BIA and CCAA. They also discuss the impact and remedies available to creditors and shareholders in the event of default by an insolvent corporate debtor during the bankruptcy proceedings.

Bankruptcy and Insolvency Act

The provisions in the Bankruptcy and Insolvency Act (BIA) set out the rights and responsibilities of all individuals and institutions involved in the affairs of a bankrupt person or a corporation. The BIA excludes railways, savings banks, loan companies and building societies. Until 1992, the BIA focused solely on liquidation, providing a legislative framework for the liquidation of assets of an insolvent individual, corporation or partnership, and the distribution of the proceeds among the creditors. In 1992, the scope of BIA was broadened to provide ways for insolvent debtors to avoid bankruptcy by negotiating reorganizations. The act governs all bankruptcies in Canada and serves the following general purposes:

To provide for the financial rehabilitation of insolvent persons and corporations
To permit an honest but unfortunate debtor to secure a fresh financial start
To provide for an orderly and a fair distribution of property of a bankrupt among his or her creditors
To allow for the investigation of the affairs of the bankrupt or insolvent person
To permit the setting aside of preferential or other fraudulent transactions so that all ordinary creditors may share equally in the realizations from the bankrupt's assets.

Companies Creditors Arrangement Act

The Companies' Creditors Arrangement Act (CCAA), is similar to Chapter 11 of the U.S. Bankruptcy Code. It is a federal bankruptcy law in Canada that governs the insolvency of only companies and corporations and not individual debtors. The primary purpose of this act is to preserve the rights of an insolvent company and its creditors so that a plan can be arranged and implemented for the benefit of all parties. While the BIA allows for both the reorganization and liquidation of insolvent businesses and individuals, the CCAA deals only with reorganization of corporations. The CCAA applies to a company with liabilities in excess of C$5 million.

Canadian companies file for protection from their creditors under CCAA which essentially gives them time to try and work out their financial difficulties with their creditors including unpaid suppliers and bondholders. As long as a CCAA order remains in place, creditors are not allowed to take any action to collect money owed to them. They can't seize the company's property or petition it into bankruptcy. Meanwhile, the company can try to strike a deal with its creditors to find a compromise . While the company’s management generally remains in charge as a debtor in possession, a monitor is appointed by the court and has certain authority at the company.

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