commercial reoganizations, consumer proposals and...

COMMERCIAL REOGANIZATIONS, CONSUMER PROPOSALS

AND UNPAID SUPPLIERS

Jeffrey M. Lee MacPherson Leslie & Tyerman LLP

Barristers and Solicitors 1500, 410 – 22nd Street East Saskatoon, SK S7K 5T6

Revised 2002 Not to be used or reproduced without permission - Saskatchewan Legal Education Society Inc.

Saskatchewan: Bar Admission Program i Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers

TABLE OF CONTENTS

I. COMMERCIAL REORGANIZATIONS ............................................................................................. 1 A. COMMENCEMENT OF THE COMMERCIAL PROPOSAL PROCESS ..................................... 1

1. Filing of Notice of Intention to Make a Proposal ....................................................................... 1 2. Filing of Cash Flow Statement ................................................................................................... 2 3. Stay of Proceedings Resulting From Notice of Intention ........................................................... 2 4. Extension of Stay of Proceedings ............................................................................................... 3 5. Early Termination of Stay of Proceedings.................................................................................. 4 6. Trustee Monitoring and Interim Receivers ................................................................................. 4 7. Filing of Proposal........................................................................................................................ 5 8. Stay of Proceedings Resulting From Proposal............................................................................ 6 9. Court Application for Deemed Refusal of Proposal ................................................................... 7 10. Provisions in Proposals for Compromise of Claims Against Directors of Insolvent ................. 8 11. Filing of Proofs of Claim in Response to a Proposal ................................................................. 9 12. Classification of Creditors........................................................................................................ 10 13. Calling the Meeting of Creditors.............................................................................................. 10 14. Process For Approval of the Proposal...................................................................................... 11 15. Creditor Approval of the Proposal ........................................................................................... 11 16. Refusal of the Proposal ............................................................................................................ 12 17. Application to Court for Approval of Proposal........................................................................ 12 18. Limitations of Certain Rights during Reorganization Proceedings.......................................... 14

B. DISCLAIMER OF COMMERCIAL LEASES ...................................................................................... 16 II. THE COMPANIES' CREDITORS ARRANGEMENT ACT ................................................................... 16 A. PURPOSE OF THE CCAA ............................................................................................................ 17 B. PROCEDURAL REQUIREMENTS OF APPLICATIONS UNDER THE CCAA ........................ 19 C. ELIGIBILITY TO APPLY FOR RELIEF UNDER THE CCAA ................................................... 22 D. 1997 AMENDMENTS TO THE CCAA ....................................................................................... 23 III. CONSUMER PROPOSALS................................................................................................................ 23 A. ELIGIBILITY................................................................................................................................ 24 B. ADMINISTRATION..................................................................................................................... 25 C. PROCEDURE................................................................................................................................ 25 D. PROTECTION FOR CONSUMER DEBTORS DURING PROPOSALS .................................... 29 E. CERTIFICATE OF EXECUTION................................................................................................. 30 IV. UNPAID SUPPLIERS, FARMERS, FISHERMEN AND AQUACULTURISTS .............................. 30 A. SUPPLIERS .................................................................................................................................. 30 B. FARMERS, FISHERMEN AND AQUACULTURISTS .............................................................. 31 APPENDICES Appendix A - Sample of Notice of Intention to Make a Proposal ........................................................A - 1 Appendix B - Commercial Reorganization Scenario............................................................................B - 1 Appendix C - Commercial Reorganization Procedural Flow Charts ....................................................C - 1

Revised August 2004 Not to be used or reproduced without permission - Saskatchewan Legal Education Society Inc.

Saskatchewan: Bar Admission Program 1 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers

I. COMMERCIAL REORGANIZATIONS

Division I of Part III of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("the BIA") contains

procedures which may be followed by insolvent commercial debtors seeking to reorganize, to

continue business and to avoid bankruptcy. These provisions ensure that, during the reorganization

process, insolvent debtors attempting reorganization are protected by a "stay of proceedings" against

them by their creditors. At the same time, the rights of creditors are protected by provisions for

trustee monitoring and recourse to the Bankruptcy Court in the event that a creditor can establish

that an insolvent debtor is abusing these provisions. In order to become legally effective, all

commercial reorganization proposals under Division I of Part III of the BIA must ultimately be

approved by the creditors and by the Bankruptcy Court.

A. COMMENCEMENT OF THE COMMERCIAL PROPOSAL PROCESS

1. Filing of Notice of Intention to Make a Proposal

1. The process for filing a commercial proposal under Part III of Division 1 of the BIA may be

commenced by the insolvent debtor either (a) filing a Notice of Intention to make a proposal or (b)

actually filing a proposal. An insolvent debtor may file a Notice of Intention to make a

reorganization proposal to creditors in the prescribed form. A sample Notice of Intention to Make

a Proposal is attached to these materials.

2. The Notice of Intention shall state:

(a) the insolvent person's intention to make a proposal;

(b) the name and address of the licensed trustee who has agreed in writing to act as the trustee under the proposal;

(c) the names of the creditors with claims of $250 and over and the amounts of their claims as known or shown in the books of the debtor along with a copy of the trustee's agreement to act in the proposal.


2 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers

2. Filing of Cash Flow Statement

3. Within ten days after filing a Notice of Intention, the insolvent person must file with the

Official Receiver a cash flow statement, together with a report by the trustee respecting the

reasonableness of the cash flow statement. Within five days after the filing of a Notice of Intention,

the trustee must send a copy of the notice to all known creditors. The trustee must monitor the

business of the debtor until the proposal is filed or the debtor goes into bankruptcy.

4. A trustee is not liable for loss or damage resulting from reliance by creditors on the cash

flow statement if he or she acted in good faith and took reasonable care in reviewing the cash flow

statement.

3. Stay of Proceedings Resulting From Notice of Intention

5. Upon the filing by an insolvent person of a Notice of Intention to make a proposal:

(a) creditors cease to have any remedy against the debtor or the debtor's property, and no one shall start or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy;

(b) no provision of a security agreement between the debtor and a secured creditor that provides that the debtor ceases to have rights to use or deal with assets secured under an agreement in the event of the following: (i) the debtor's insolvency; (ii) the default by the debtor of an obligation under the security agreement; or (iii) the filing by the debtor of a Notice of Intention to make a proposal;

has any force or effect; and

(c) the Crown will not be able to garnishee for source deductions pursuant to section 224(1.2) of the Income Tax Act or similar provincial legislation.

6. The stay of proceedings does not ipso facto result in a stay of a bankruptcy petition filed

against the insolvent debtor. Such bankruptcy petitions can proceed against the debtor during the

stay of proceedings: Provincial Refining Co. v. Newfoundland Refining Co. (1977), 27 C.B.R.

(N.S.) 192 (Nfld. C.A.), aff'd at [1978] 2 S.C.R. 386.


Saskatchewan: Bar Admission Program 3 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 7. The stay of proceedings remains effective until the filing of a proposal or the bankruptcy of

the insolvent person.

8. The stay of proceedings does not apply where a secured creditor took possession of secured

assets before the filing of a Notice of Intention. Also, if a secured creditor has served upon the

debtor notice of intention to enforce its security against the debtor under section 244 of the BIA more

than ten days prior to the debtor serving its Notice of Intention to Make a Proposal, the stay of

proceedings does not prevent that secured creditor from enforcing that security.

4. Extension of Stay of Proceedings

9. A proposal must be filed within 30 days after filing the Notice of Intention. ACcourt can

extend the period for 45 days at a time, but the total extension must not exceed five months after the

expiration of the initial 30 day period. If a proposal is not filed within the 30 day period (or any

extension thereof) or if the cash flow statement is not filed within ten days of the filing of the Notice

of Intention, the insolvent person is deemed to have made an assignment into bankruptcy on the

earlier of:

(a) the day on which the Notice of Intention was filed; or

(b) the day on which the first petition for a receiving order was filed.

10. As stated above, if the debtor is unable to file a proposal within the 30 day period, he or she

may apply to the Court for an extension of time and further extensions if necessary. In order to

obtain such an extension, the debtor must satisfy the Court that:

(a) the debtor has acted, and is acting, in good faith and with due diligence;

(b) the debtor would likely be able to make a viable proposal if the extension being applied for were granted; and

(c) no creditor would be materially prejudiced if the extension being applied for were granted.


4 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 5. Early Termination of Stay of Proceedings

11. The 30 day stay period or any extension can be shortened by the Court and the time period

for filing a proposal terminated. An application for this purpose may be made by the trustee, the

interim receiver or a creditor. The Court will make such an order if it is satisfied that:

(a) the debtor has not acted or is not acting in good faith and with due diligence;

(b) the debtor will likely be unable before the expiration of the time period to make a viable proposal;

(c) the debtor will likely be unable before the expiration of the time period to make an acceptable proposal to the creditors; or

(d) the creditors as a whole would be materially prejudiced if the application to terminate the time period was refused.

12. When the Court terminates a 30 day period or any extension, the debtor shall be deemed to

have made an assignment into bankruptcy on the earlier of the day on which the Notice of Intention

was filed or the day in which the first petition, if any, for a receiving order was filed.

6. Trustee Monitoring and Interim Receivers

13. During the stay of proceedings, the licensed trustee acting under the proposal must monitor

the debtor's affairs and report to creditors. For this purpose, the trustee will have access to and must

examine the insolvent person's property, including his premises, books, records and other financial

documents, to the extent necessary to adequately assess the insolvent person's business and financial

affairs. The monitoring role of the trustee continues from the filing of the Notice of Intention until a

proposal is filed or the insolvent person becomes bankrupt. The trustee is required to file a report on

the state of the insolvent person's business and financial affairs:

(a) with the Official Receiver forthwith upon ascertaining any material adverse change in the insolvent person's projected cash flow or financial circumstances; and

(b) with the Court at or before the hearing by the Court of any application for an extension of time for filing a proposal and at such other times as a Court may order.


Saskatchewan: Bar Admission Program 5 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 14. It is important to note that when a commercial reorganization proposal is filed, the debtor's

assets do not vest in the trustee named in the proposal. The trustee named in the proposal does not

assume overall responsibility for the debtor's assets and affairs. Rather, the trustee's function is to

monitor and to report to the Bankruptcy Court and the creditors.

15. Where a Notice of Intention has been filed or a proposal has been made by an insolvent

person, the Court can appoint an interim receiver. The appointment of an interim receiver after the

service of a Notice of Intention or the filing of a proposal does not require an undertaking as to

damages to be given by the receiver.

16. While the statute does not specify who can bring the application, it is reasonable to assume

that the trustee acting in the proposal or any creditor or number of creditors could apply.

17. The Court has the power to appoint the interim receiver for such term as the Court sees

fit. It is possible for an appointment to continue after an order has been made approving the

proposal.

7. Filing of Proposal

18. A proposal may be made by:

(a) an insolvent person;

(b) a receiver (but only in relation to an insolvent person);

(c) a liquidator of an insolvent person's property;

(d) a bankrupt; and

(e) a trustee of the estate of a bankrupt.


6 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 19. A proposal may be made to both secured and unsecured creditors. In order to make a

proposal to secured creditors, a proposal must be made to unsecured creditors. The proposal need

not be made to all secured creditors. However, if a proposal is made to some secured creditors

within a particular class of creditors, it must be made to all secured creditors within that particular

class.

20. Where a proposal is made before bankruptcy, proceedings are commenced by lodging a

proposal, together with a statement showing the financial position of the debtor at the date of the

proposal verified by an affidavit. A copy of the proposal is filed with the Official Receiver in the

locality of the debtor. The trustee will also file a cash flow statement, a report on the

reasonableness of the cash flow statement prepared and signed by the trustee, and a report in

Form 22.3 containing representations by the insolvent person regarding the preparation of the

cash flow statement.

21. In the case of a proposal made after bankruptcy, the proposal and the statement of affairs are

lodged with the trustee and a copy of the proposal is filed with the Official Receiver. A proposal

made by a bankrupt must be approved by any inspectors of the bankruptcy estate before any further

action is taken. It is therefore necessary to have a meeting of inspectors before a meeting can be

called to consider a proposal.

8. Stay of Proceedings Resulting From Proposal

22. Upon the filing of a proposal by an insolvent person, a further stay of proceedings is imposed

on all creditors to whom the proposal is made, pending a meeting of the debtors' creditors. Such a

meeting must be held within 21 calendar days. If the proposal is approved by the creditors, the stay of

proceedings continues until the proposal has been fully performed. Otherwise, the stay of proceedings

will continue until the insolvent person becomes bankrupt.


Saskatchewan: Bar Admission Program 7 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 23. The stay of proceedings imposed on a secured creditor by the filing of a proposal does not

apply if the secured creditor took possession of assets of the debtor prior to the filing of the proposal.

It also does not apply if the secured creditor gave Notice of Intention to enforce its security (under

section 244 of the BIA), more than ten days prior to the filing by the debtor of the Notice of Intention

to Make a Proposal, or if no Notice of Intention was filed by the debtor, more than ten days prior to

the filing by the debtor of the proposal itself.

24. If the proposal filed does not deal with the claim of a particular secured creditor, the stay of

proceedings does not apply to that particular secured creditor. Similarly, if a particular class of

secured creditors reject the proposal at the meeting of creditors, the stay of proceedings is terminated

as against that class of secured creditors.

25. A creditor who is subject to a stay may apply to the Court to lift the stay. Such a creditor

must satisfy the Court that:

(a) the creditor is likely to be significantly prejudiced by the continuance of the stay; or

(b) it is equitable on other grounds that the stay be lifted. 26. When lifting a stay, the Bankruptcy Court may impose whatever terms on the creditor that it

considers proper.

9. Court Application for Deemed Refusal of Proposal

27. As a result of amendments effective September 30, 1997, section 50(12) of the BIA permits a

trustee, interim receiver or creditor to apply to the Bankruptcy Court for an Order declaring that the

proposal is deemed to have been refused by the creditors. In order to grant such an Order, the

Bankruptcy Court must be satisfied that:

(a) the debtor has not acted, or is not acting, in good faith and with due diligence;

(b) the proposal will not likely be accepted by the creditors; or

(c) the creditors as a whole would be materially prejudiced if the application under this section is rejected.


8 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 10. Provisions in Proposals for Compromise of Claims Against Directors of Insolvent

Corporate Debtors

28. As a result of amendments effective September 30, 1997, Division I of Part III of the BIA

now permits commercial proposals to contain provisions for compromise of claims against directors

of insolvent corporate debtors.

29. Section 50(13) of the BIA provides that a proposal made by an insolvent corporation may

include provision for compromise of claims against directors of the corporation which: (a) arose

before the commencement of proceedings under the BIA; and (b) which relate to the obligations of

the corporation where the directors are by law liable in their capacity as directors for the payment of

such obligations. Examples of such claims against directors would include claims for unpaid wages,

unpaid GST or unpaid employee source deductions.

30. Section 50(14) of the BIA provides that the following types of claims against directors

cannot be compromised in a proposal, namely:

(a) claims that relate to contractual rights of creditors arising from contracts with directors; and

(b) claims based on allegations of misrepresentation made by directors to creditors or of wrongful or oppressive conduct by directors.

31. In addition, section 50(15) of the BIA provides that the Bankruptcy Court may declare that a

claim against directors shall not be compromised if it is satisfied that the compromise would "not be

just and equitable in the circumstances".

32. Upon the filing of a proposal or a notice of intention to make a proposal by an insolvent

corporation, section 69.31 of the BIA operates to impose a stay of proceedings against directors of

the corporation on any claim against the directors that: (a) arose before the commencement of

proceedings under the BIA; and (b) which relates to obligations of the corporation where directors


Saskatchewan: Bar Admission Program 9 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers are under any law liable in their capacity as directors for the payment of such obligations. Such a

stay of proceedings against directors continues until the proposal is approved by the Bankruptcy

Court or the corporation becomes bankrupt. The stay of proceedings against directors does not

apply: (a) in respect of an action against a director on a guarantee given by a director relating to the

corporation's obligations; or (b) on an action seeking injunctive relief against a director in relation to

the corporation.

33. Further, section 69.4 of the BIA empowers the Bankruptcy Court to grant an Order (upon

application of a creditor) declaring that the section 69.31 stay of proceedings against directors of an

insolvent corporation no longer apply to that creditor. The Bankruptcy Court may make such an

Order if it is satisfied that one of the conditions described above in paragraph 25 hereof have been

established.

11. Filing of Proofs of Claim in Response to a Proposal

34. A secured creditor included in a proposal may file a proof of claim and vote on all questions

relating to the proposal. If none of the secured creditors of a particular class who are included in the

proposal bother to file a proof of claim of security, the secured creditors of that class shall be deemed

to have voted against the proposal.

35. A secured creditor not included in a proposal cannot file a proof of secured claim.

36. If a bankruptcy follows a proposal, any proof of security filed in the proposal ceases to be

valid or effective in the proposal and the secured creditor will be subject to the provisions relating to

a secured creditor in a bankruptcy.


10 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 12. Classification of Creditors

37. Secured claims belong to the same class if the interests of the creditors holding the claims are

sufficiently similar to give them a commonality of interest, taking into account:

(a) the nature of the claim;

(b) the nature and priority of the security on the claim;

(c) the remedies available to the creditors and the likelihood that the claims would be recovered in the absence of the proposal; and

(d) the treatment of the claims and the likelihood that the claims would be recovered under the proposal.

38. Any interested person may apply to the Court, any time after the Notice of Intention or

proposal is filed, to determine the classes of secured claims and the class into which a claim falls.

13. Calling the Meeting of Creditors

39. Within 21 days following the filing of the proposal with the Official Receiver, the trustee

must call a meeting of creditors, by sending by ordinary mail, at least ten days before the meeting, to

every known creditor and to the Official Receiver, the following:

(a) a notice of the date, time and place of the meeting;

(b) a condensed statement of the debtor's assets and liabilities;

(c) a list of creditors with claims amounting to $250 or more and the amounts of their claims as known or shown in the debtor's books;

(d) a copy of the proposal;

(e) a blank proof of claim and proof of secured claim in the case of a secured creditor to whom the proposal is made and a proxy;

(f) a voting letter; and

(g) the trustee's monitor report on the debtor's business and financial affairs.


Saskatchewan: Bar Admission Program 11 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 40. The Official Receiver or nominee of the Official Receiver acts as the chair for the meeting of

creditors. The chair shall decide any questions or disputes arising at the meeting and any creditor

may appeal any such decision to the Court.

14. Process For Approval of the Proposal

41. Any creditor who has proved its claim may assent or dissent from the proposal by means of a

voting letter referred to above. The voting letter may be sent by ordinary mail or telecopier. The

letter must be received by the trustee at or prior to the meeting and has the same effect as if the

creditor was present and voted at the meeting. If the proposal is accepted, a resolution evidencing

such acceptance must be completed. If the resolution is carried unanimously, creditors do not have

to sign the resolution, but when the vote is not unanimous all creditors and holders of proxies voting

should sign the resolution either for or against. The signed resolution is made part of the trustee's

report to the Court.

42. Secured creditors included by the debtor in the proposal and all unsecured creditors are

entitled to vote on the proposal. Creditors are required to vote by class with the unsecured creditors

constituting one class unless the proposal provides otherwise.

15. Creditor Approval of the Proposal

43. The vote of the secured creditors does not affect the acceptance or rejection of a proposal.

However, the vote of the secured creditors is binding on those secured creditor that were in classes

which voted for the acceptance of the proposal by a majority in number and two-thirds in value. A

proposal is deemed to be accepted if all classes of unsecured creditors vote to accept the proposal

by a majority in number and two-thirds in value of the claims.

44. It should be noted that persons related to the insolvent person may vote against but not for

the acceptance of a proposal.


12 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 16. Refusal of the Proposal

45. If the creditors refuse the proposal, the debtor is deemed to have made an assignment in

bankruptcy on the earliest of the following:

(a) the day on which the proposal was filed;

(b) the day on which the Notice of Intention to make a proposal was filed, if such a notice was filed;

(c) the day on which the first petition for a receiving order was filed. 46. In such event, the trustee must immediately file a report with the Official Receiver who in turn

will issue a Certificate of Assignment, forthwith mail a copy to the trustee and file a copy with the

Court.

47. If a quorum is present at the meeting of creditors which rejected the proposal, the chairman of

the meeting may immediately proceed with the first meeting of creditors in the bankruptcy.

48. If a quorum of creditors is not present at the creditors' meeting, the trustee must issue, within

five days after the issuance of a Certificate of Assignment by the Official Receiver, a notice calling a

first meeting of creditors in the bankruptcy.

17. Application to Court for Approval of Proposal

49. Within five days after the proposal has been accepted by creditors, the trustee is required to

apply to the Bankruptcy Court for an appointment for a hearing of the application for approval of the

proposal. No later than fourteen days before the hearing date, the trustee must send notice of the

hearing to:

(a) every creditor who has proved a claim, whether secured or unsecured; and

(b) the Official Receiver.


Saskatchewan: Bar Admission Program 13 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 50. The trustee must further file a Court Report with the Official Receiver ten days prior to the

hearing and with the Bankruptcy Court at least three days prior to the hearing.

51. In determining whether or not it will approve the proposal, the Bankruptcy Court will

consider the trustee's report and may hear such further evidence as it deems advisable in deciding

whether or not to approve the proposal. The Court will consider two questions when determining

whether or not to approve the proposal. First, are the terms of the proposal reasonable? Second, are

the terms of the proposal calculated to benefit the general body of creditors? In determining whether

or not to approve the proposal, the Court must consider not only the wishes and interests of creditors,

but the conduct of the debtor and the interest of the public and future creditors and requirements of

commercial morality.

52. The Court is required to refuse a proposal if any of the following conditions have not been

met:

(a) unless otherwise agreed to, arrangements have been made for payment, within six months of Bankruptcy Court approval, of all amounts payable for source deductions of income tax, C.P.P. and U.I.C. or similar deductions pursuant to provincial legislation;

(b) the debtor has not defaulted in his remittances for source deductions to Her Majesty at the Federal or Provincial level subsequent to the filing of the Notice of Intention or the proposal, if no Notice of Intention was filed; and

(c) if the debtor making the proposal is an employer, the proposal must provide for payment to employees or former employees, immediately after the Court approval of:

(i) all wages or salaries for services rendered during the previous six months to the extent of $2,000 and for expenses of travelling salesmen to the extent of $1,000; and

(ii) all wages, salaries, commissions or compensation for services rendered between the date of the commencement of proceedings under the BIA and the date of court approval of the proposal.


14 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 53. If the Court refuses to approve the proposal, the insolvent person is deemed to have made an

assignment into bankruptcy on the earliest of the day on which the proposal was filed, the day on

which the Notice of Intention, if any, was filed, or the day on which the first petition, if any, was

filed.

54. The trustee must immediately file a report with the Official Receiver who in turn will issue a

Certificate of Assignment, forthwith mail a copy to the trustee and file a copy with the Court.

55. Within five days following the issuance of the Certificate of Assignment by the Official

Receiver, the trustee must send notice of the first meeting of creditors by ordinary mail. At this

meeting, the creditors may, by ordinary resolution, confirm the appointment of the trustee or

substitute him with another licensed trustee.

18. Limitations of Certain Rights during Reorganization Proceedings

56. The Bankruptcy and Insolvency Act provides that where a Notice of Intention or proposal

has been filed by an insolvent person, no person may terminate, amend or claim any accelerated

payment under any agreement with the insolvent person by reason only that the insolvent person is

insolvent, or a Notice of Intention or proposal has been filed. This language is broad enough to

prohibit creditors treating debtors as being in default under security agreements by reason only of

having filed a proposal.

57. Further, where the agreement is a lease or licensing arrangement, no person may terminate,

amend or claim any accelerated payment under such an agreement by reason only that the insolvent

person has not paid rent or royalties or payments of a similar nature for the period proceeding the

filing of the Notice of Intention or, if no notice was filed, for the period proceeding the proposal.


Saskatchewan: Bar Admission Program 15 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 58. Further, a public utility company may not discontinue service to the debtor by reason only that

the person is insolvent, has filed a proposal, or has not paid for services or material provided before

the filing of the intention or of the proposal, and the case may be.

59. Although a third party may not terminate, amend or claim any accelerated payment under any

agreement, nor may a public utility discontinue service, the legislation does not go so far as to compel

these parties to advance further money or credit or to supply further goods or services other than for

payments in cash. Indeed, the insolvent debtor will typically be required to pay for goods and services

on a "cash" basis after filing a notice of intention to make a proposal.

60. The Bankruptcy Court may, on application by a creditor, waive the provisions of this section if

it is satisfied that the restrictions imposed by the provisions would likely cause significant hardship to

the applicant.

61. It is not absolutely clear whether or not these provisions would apply to an operating line of

credit, thus compelling a lender to allow an operating line to continue to revolve provided margin

requirements were complied with. The Court of Queen's Bench for Saskatchewan in Bankruptcy was

prepared to make such an order compelling a bank to revolve an operating line of credit during a

commercial reorganization in National Bank of Canada v. Dutch Industries Ltd. (1996), 149 Sask. R.

315 (Q.B.).

62. It is expressly provided in the BIA that any provision in any contract contrary to the above is

void and of no effect.



B. DISCLAIMER OF COMMERCIAL LEASES

63. Section 65.2 of the BIA provides that an insolvent person who has filed a proposal or notice of

intention to make a proposal and who is a commercial tenant under a lease of real property may elect

to disclaim the lease by giving 30 days' notice to the landlord in the prescribed manner. The

disclaiming tenant must indicate in its notice whether the landlord may file a proof of claim for actual

losses resulting from the disclaimer; or for an amount based on the following formula, namely, the

lesser of:

(i) the aggregate of: (a) the rent provided for in the first year of the lease following the date on which

the disclaimer becomes effective, and (b) 15% of the rent for the remainder of the term of the lease after that year, and

(ii) three years' rent. 64. Section 65.2(1) of the BIA also provides that the landlord has no claim in the proposal for

accelerated rent. Section 65.2(5) of the BIA provides that a landlord's claim can be classified in either:

(a) a separate class of similar claims of landlords; or (b) a class of unsecured claims that includes

claims of creditors who are not landlords.

65. The landlord is allowed to vote on the proposal in whichever class it is included, and for the

amount of the claim as proven.

II. THE COMPANIES' CREDITORS ARRANGEMENT ACT

66. The Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("the CCAA") is a federal

statute which was enacted during the economic depression of the 1930's as an attempt to provide an

alternative to the bankruptcy or winding up of a corporation in financial difficulty. The objective of

the CCAA is to allow a corporation to continue as a going concern with a view to preserving the

goodwill of the company, to maximize the return available to creditors, shareholders



and other stakeholders and to preserve employment and economic activity. The CCAA underwent

extensive amendments effective September 30, 1997.

A. PURPOSE OF THE CCAA

67. The purpose of the CCAA has been described in numerous articles and reported decisions. In

Arrangements Under the Companies' Creditors Arrangement Act, 1 C.B.R. (3d) 135, David Goldman

et al. stated the purpose of the CCAA as follows:

“An important objective of our insolvency system in Canada is to preserve viable businesses and to avoid liquidations which disperse assets and destroy going-concern values. Serious economic and social losses are caused by liquidations. Jobs are lost; shareholders lose the value of their shares; creditors lose any opportunity of recovering more than break-up value of the assets; customers may lose their sources of supply; and competition may be reduced. These problems may be avoided if there is a reorganization and rehabilitation of the insolvent business.

. . .

Substantively, the CCAA facilitates the preservation of viable businesses and permits them to re-establish themselves by providing for a stay of proceedings which operates to restrain attempts by both secured and unsecured creditors as well as other claimants to realize upon security or to enforce claims against the debtor during the reorganization period.”

68. In Re Companies' Creditors Arrangement Act; Attorney General for Canada v. Attorney

General for Quebec, [1934] S.C.R. 659, 16 C.B.R. 1, [1934] 4 D.L.R. 75, Chief Justice Duff stated

that the aim of the CCAA was to:

“deal with the existing condition of insolvency in itself to enable arrangements to be made in view of the insolvent condition of the company under judicial authority which, otherwise, might not be valid prior to the initiation of proceedings in bankruptcy.”



69. His Lordship further held that the purpose of the CCAA was to:

“enable a court to sanction a compromise which, although binding upon a class of creditors only, would be beneficial to the general body of creditors as well, it may be, as to the shareholders.”

70. A more recent decision from the British Columbia Court of Appeal also confirms the purpose

of the CCAA. In Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 51 B.C.L.R. (2d) 84, 4

C.B.R. (3d) 311, (sub nom. Chef Ready Foods Ltd. v. Hongkong Bank of Canada, [1991] 2 W.W.R.

136) (B.C.C.A.), the British Columbia Court of Appeal states that the purpose of the CCAA is as

follows:

“The CCAA was enacted by Parliament in 1933 when the nation and the world were in the grip of an economic depression. When a company became insolvent liquidation followed because that was the consequence of the only insolvency legislation which then existed--the Bankruptcy Act and the Winding-up Act. Almost inevitably liquidation destroyed the shareholders' investment, yielded little by way of recovery to the creditors, and exacerbated the social evil of devastating levels of unemployment. The government of the day sought, through the CCAA, to create a regime whereby the principals of the company and the creditors could be brought together under the supervision of the court to attempt a reorganization or compromise or arrangement under which the company could continue in business.”

71. One further recent description of the purpose of the CCAA is found in the decision of Borins,

J. of the Ontario Commercial Court in Sklar-Peppler Furniture Corp. v. Bank of Nova Scotia (1991),

8 C.B.R. (3d) 312, 86 D.L.R. (4th) 621 (Ont. Gen. Div.):

“The proposed plan exemplifies the policy and objectives of the Act as it proposes a regime for the court-supervised re-organization of the applicant company intended to avoid the devastating social and economic effects of a creditor-initiated termination of its ongoing business operations and enabling the company to carry on its business in a manner in which it is intended to cause the least possible harm to the company, its creditors, its employees and former employees and the communities in which it carries on its business operations.”


Saskatchewan: Bar Admission Program 19 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 72. To accomplish the stated purpose of the CCAA, Canadian courts have consistently held that

the statute must be given a broad and liberal interpretation. See, for example, the following cases:

• Re Chef Ready Foods, supra

• Meridian Developments Inc. v. Toronto-Dominion Bank; Meridian Developments Inc. v. Nu-West Ltd., [1984] 5 W.W.R. 215, 52 C.B.R. (N.S.) 109, 32 Alta. L.R. (2d) 150, 53 A.R. 39 (Q.B.)

• Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada, [1989] 3 W.W.R. 363, 73 C.B.R. (N.S.) 195, 34 B.C.L.R. (2d) 122 (C.A.)

• Re Fifer and Frame Manufacturing Corp., [1947] Que. K.B. 348, 28 C.B.R. 124 (C.A.)

B. PROCEDURAL REQUIREMENTS OF APPLICATIONS UNDER THE CCAA

73. The procedure on an application under the CCAA is prescribed by section 10 of that Act,

which reads as follows:

“10. Applications under this Act shall be made by petition or by way of originating summons or notice of motion in accordance with the practice of the court in which the application is made.”

74. In Saskatchewan, section 10 of the CCAA must be read in conjunction with Rule 451 of the

Queen's Bench Rules, which reads as follows:

“451. Where under any statute, proceedings are authorized to be commence by originating summons or by chamber summons, such proceedings may be commenced by notice to be called an originating notice, as hereinafter set out.”

75. Therefore, based on the interrelation of section 10 of the CCAA and Rule 451 of the Queen's

Bench Rules, in Saskatchewan, an application for relief under the CCAA may be brought by way of

originating notice.


20 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 76. Section 11 of the CCAA specifically authorizes the court to make such an order without notice

to creditors. Section 11 states:

“11. Notwithstanding anything in the Bankruptcy and Insolvency Act or the Winding-up Act, where an application is made under this Act in respect of a company, the court, on the application of any person interested in the matter, may, subject to this Act, on notice to any other person or without notice as it may see fit, make an order under this section.”

77. The propriety of proceeding ex parte on an initial CCAA application was confirmed by Chief

Justice MacPherson of the Saskatchewan Court of Queen's Bench in Silcorp Ltd. v. Iatridis Holdings

Ltd. [1992] 6 W.W.R. 535, 104 Sask. R. 11, 14 C.B.R. (3d) 22 (Q.B.). MacPherson, C.J.Q.B., held as

follows:

“ . . the wording of ss. 10 and 11 of the CCAA expressly authorizes the court, to which an application has been made under those section, to make an order "on notice to any other person or without notice as it may see fit." I must accept parliament's plain words and hold that the Ontario court's three orders dispensing with service of notice of the applications on other than the parties named in those orders, acted with full authority and within its jurisdiction. Perhaps I should add that parliament, in giving to the courts sweeping powers contained in the CCAA, was aware that circumstances may arise where a company, with widespread operations such as Silcorp, would make an application under this Act, and be cognizant that if every person or entity which could be affected by an order under the Act must be duly served, the time consumed in simply endeavouring to effect service on such a multitude of interested parties, could have the effect of destroying the very purpose of the Act. That purpose is to give a troubled company the opportunity of restructuring its operations and thereby preserving jobs and valid economic interests rather than leaving bankruptcy as the only alternative which would probably require the termination of many jobs together with otherwise avoidable or partially avoidable economic losses.”

78. Of similar effect is the decision of Saunders, J. of the Nova Scotia Supreme Court, Trial

Division in Re Keppoch Development Ltd. (1991), 8 C.B.R. (3d) 95 (N.S.S.C.). Therein, the bank of

an insolvent company imposed a deadline for payment of the corporation's indebtedness. A forced

liquidation would have greatly reduced the likelihood of recovery by the unsecured creditors.


Saskatchewan: Bar Admission Program 21 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers In the circumstances, Saunders, J. accepted the necessity for the ex parte application. In so doing, he

stated as follows:

“I am also persuaded, given the considerable urgency of the matter, that it is entirely proper, as the statute indicates, for the application to have been made ex parte. It would not have been feasible for the applicant to notify all of the potential secured or unsecured creditors of its intention to appear in court today, in advance of the deadline imposed by the bank, which falls tomorrow, Saturday, June 15.”

79. Sections 4 and 5 of the CCAA set forth the basic framework for an application under the

CCAA. Those sections are as follows:

“4. Where a compromise or an arrangement is proposed between a debtor company and its unsecured creditors or any class of them, the court may, on the application in a summary way of the company, of any such creditor or of the trustee in bankruptcy or liquidator of the company, order a meeting of the creditors or class of creditors, and, if the court so determines, of the shareholders of the company, to be summoned in such a manner as the court directs.

5. Where a compromise or an arrangement is proposed between a debtor company and its secured creditors or any class of them, the court may, on the application in a summary way of the company or any such creditor or the trustee in bankruptcy or liquidator of the company, order a meeting of the creditors or class of creditors, and, if the court so determines, of the shareholders of the company, to be summoned in such manner as the court directs.”

80. An issue which has arisen in the interpretation of these sections is whether a company

applying under the CCAA is required to file its plan of arrangement at the time of its initial

application; or, alternatively, whether the filing of the plan can be deferred to a later date. This

issue was directly addressed by the Nova Scotia Supreme Court in Re Fairview Industries Ltd.

(1991), 11 C.B.R. (3d) 43, (sub nom. Fairview Industries Ltd., Re (No. 2), 109 N.S.R. (2d)

12), 297 A.P.R. 12), where the court held:



“Argument was presented that the court should interpret s. 3(b) and ss. 4 or 5 as speaking in the present and that because a trust deed is a prerequisite, a compromise or arrangement is also a prerequisite to obtaining an initial order. With deference, I cannot agree. A company needs time to come up with a plan and that is what can be granted in the initial order. Some companies may be able to come in with a plan initially, but it cannot be an absolute requirement.”

81. Other reported decisions in which Canadian courts have granted an initial CCAA stay of

proceedings without the requirement of filing a plan of arrangement with the initial application

include the following:

Fisher Oil & Gas Corp. and Peat Marwick Ltd. v. Guaranty Bank and Trust Co. (1982), 44 C.B.R. (N.S.) 224, 40 O.R. (2d) 548, 142 D.L.R. (3d) 43 (C.A.)

Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 80 C.B.R. (N.S.) 98 (B.C.S.C.)

Re Northland Properties Ltd. (1988), 69 C.B.R. (N.S.) 266, 73 C.B.R. (N.S.) 146, 29 B.C.L.R. (2d) 257 (S.C.)

Re 229531 B.C. Ltd. (1989), 72 C.B.R. (N.S.) 310 (B.C.S.C.)

C. ELIGIBILITY TO APPLY FOR RELIEF UNDER THE CCAA

82. Section 3 of the CCAA limits the applicability of the CCAA to certain types of debtor corporations

only. That section reads as follows:

“3. This Act applies in respect of a debtor company or affiliated debtor companies where the total of claims, within the meaning of section 12, against the debtor company or affiliated debtor companies exceeds five million dollars.”

(Emphasis added)



D. 1997 AMENDMENTS TO THE CCAA

83. Extensive amendments to the CCAA were made effective September 30, 1997. These

amendments change the procedures under the CCAA and the effect of CCAA proceedings quite

significantly. Previous CCAA caselaw should therefore be read with these amendments in mind.

84. Highlights of the new amendments include:

(a) section 5.1(1) of the CCAA now contemplates CCAA stays of proceedings against directors of insolvent companies;

(b) section 6 of the CCAA now provides that the required level of support which a CCAA plan must achieve among the creditors in order to be effective has been reduced from three-quarters in value of claims to two-thirds in value of claims;

(c) the Court is required to appoint a monitor to verify the business and financial affairs of the company while any CCAA stay of proceedings is in effect (section 11.7 of the CCAA);

(d) section 11.4(1) of the CCAA now provides that the CCAA Court Order may expressly operate to stay the Crown from exercising its enhanced garnishment rights under section 224(1.2) of the Income Tax Act;

(e) the court-appointed monitor is provided with certain protection against environmental liability by section 11.8(3) of the CCAA; and

(f) section 18.3(1) of the CCAA provides that statutory deemed trust provisions protecting Crown claims do not apply in CCAA proceedings

III. CONSUMER PROPOSALS

85. The provisions for consumer proposals were added to the Bankruptcy and Insolvency Act in

November of 1992 to help prevent consumer bankruptcies. Consumers who owe $75,000 or less,

excluding mortgages on their principal residence, will be able to negotiate with their creditors for the

reduction or extension of the time for payment of their debts. The consumer proposal is completely

distinct from the traditional proposal and is intended to provide a streamlined process which will

provide the individual with a timely and cost-effective tool to deal with his or her creditors.


24 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers A. ELIGIBILITY

86. An individual who owes $75,000 or less (excluding debts owing on mortgages on the debtor's

principal residence) can make a consumer proposal. The Act defines such an individual as a

"consumer debtor".

87. There are certain other restrictions on persons eligible to make a consumer proposal. If a

consumer debtor has filed a Notice of Intention to make a proposal pursuant to the commercial

reorganization provisions, he or she cannot make a consumer proposal until the trustee under the

previous proposal has been discharged.

88. Further, if a consumer debtor has made a proposal and the proposal has been annulled, he or

she cannot make anther consumer proposal until all claims of creditors under the first proposal have

been paid or released by a discharge from bankruptcy.

89. If a consumer debtor makes a consumer proposal when he or she is not eligible to make such a

proposal and the administrator discovers this before filing of the proposal, the proposal may not be

filed. If the administrator does not know of the ineligibility, files the proposal and then learns of the

debtor's ineligibility, he or she is required to inform the creditors and the Official Receiver of the

ineligibility. The Court may refuse to approve a proposal because of the debtor's ineligibility, but has

the discretion, if it sees fit, to approve the proposal.

90. Section 66.12(1.1) of the BIA provides that, subject to Directives of the Superintendent of

Bankruptcy, two or more consumer proposals may be dealt with as one consumer proposal if the

proposals can reasonably be dealt with together because of the financial relationship of the consumer

debtors involved.



B. ADMINISTRATION

91. In order to make a consumer proposal, a consumer debtor must obtain the services of an

administrator as defined in the BIA. An administrator is either a trustee or a person appointed or

designated by the Superintendent of Bankruptcy to administer consumer proposals.

92. It was the intention of the legislation to make the process of consumer proposals available to

all consumers. Therefore, the ability of the Superintendent in Bankruptcy to appoint or designate

individuals to act as administrators of consumer proposals without those individuals being licensed

trustees in bankruptcy is intended to have the effect of making the consumer proposal provisions

available in more remote areas of the country.

C. PROCEDURE

93. A consumer proposal can be made for a settlement of debts, or an extension of time for

payments, or both. Performance of the terms of the proposal must be completed within five

years.

94. A consumer debtor who wishes to make a consumer proposal commences proceedings by

obtaining the assistance of an administrator. The administrator will investigate the debtor's financial

affairs and can provide, or provide for, counselling of the debtor.

95. The consumer debtor must provide the administrator with the following information:

(a) any financial information about the consumer debtor that could be useful for the preparation of a consumer proposal;

(b) an explanation of the causes of the consumer debtor's insolvency; and

(c) such other information as the administrator may require.


26 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 96. The administrator investigates, or causes to be investigated, the consumer debtor's property

and financial affairs, so as to be able to assess with reasonable accuracy the consumer debtor's

financial situation and the cause of insolvency. Thereafter, the administrator prepares the consumer

proposal in the prescribed form.

97. Within ten days after the filing with the Official Receiver, the administrator prepares a report

containing the following information:

(a) the results of the administrator's initial investigation;

(b) the administrator's opinion as to whether the proposal is fair and reasonable to the creditors and the consumer debtor and whether the consumer debtor will be able to perform it;

(c) a condensed statement of the consumer's assets, liabilities, income and expenses; and

(d) a list of creditors whose claims exceed $250.

98. Within the same ten day time period the administrator is required to send to every known

creditor the following items:

(a) a copy of the consumer proposal;

(b) a proof of claim; and

(c) a statement explaining that a meeting of creditors will only be called if required by the Official Receiver or requested by at least 25% of the consumer debtor's creditors by value.

99. The Official Receiver can direct the Administrator to call a meeting of creditors. Further, if

creditors holding 25% in value of the debts request that a meeting be held, the Administrator must call

a meeting. Any dissent received by the Administrator prior to the expiration of a 30 day period

following the filing of the consumer proposal will be deemed a request for a meeting of creditors. The

meeting of creditors must be held within 21days after it is called.


Saskatchewan: Bar Admission Program 27 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 100. At least ten days prior to the meeting, the Administrator must send to the debtor, to every

known creditor and to the Official Receiver a notice of the meeting of creditors, setting out the time

and place of the meeting, and containing a form of proxy and voting letter.

101. If no meeting of creditors is held, the proposal, after 30 days, is deemed to be accepted by

creditors. Further, if there is no quorum at a meeting of creditors, the proposal is also deemed to be

accepted by the creditors.

102. If the meeting of creditors is held, the Official Receiver or his or her designate acts as

chairman and the creditors can accept or reject the proposal by ordinary resolution. All creditors at

the meeting of creditors vote as a single class. Any creditor who is related to the consumer debtor

may vote against but not for the acceptance of the consumer proposal. If the Administrator is a

creditor of a consumer debtor, he or she may not vote on the proposal.

103. Within five days after the acceptance or rejection of a consumer proposal, the Administrator is

required to notify every known creditor and the Official Receiver of the status of the proposal.

104. If a consumer proposal is accepted or deemed to be accepted by creditors, in most cases, there

will be no need to apply to the Court for approval. The proposal is deemed to be approved by the

Court unless the Official Receiver or some other interested party requires that a formal application be

made for court approval. The term "other interested party" is extremely broad. It would appear to

embrace any creditor, secured or unsecured, regardless of whether or not the creditor has in fact filed a

proof of claim.

105. After 30 days, if no person has requested that the proposal be approved by the Court, the

proposal is deemed to be approved by the Court and the Administrator must so advise the following

persons (within five days), by ordinary mail:

(a) the consumer debtor; (b) every known creditor; and (c) the Official Receiver.


28 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 106. If it is necessary for the Administrator to apply to the Court to have the consumer proposal

reviewed, the following steps must be taken:

(a) the Administrator sends a notice of the hearing, by ordinary mail, at least 14 days before the date of the hearing, to:

(i) the consumer debtor; (ii) every creditor who as proved a claim; and (iii) the Official Receiver;

(b) the Administrator prepares a report on the consumer proposal and the conduct of the consumer debtor; and

(c) the Administrator must forward a copy of the report to the Official Receiver at least ten days before the date of the hearing and file the report with the Court at least three days before the date of the hearing.

107. On determining whether or not to approve the consumer proposal, the Court shall consider

whether or not the consumer proposal is reasonable and fair to the consumer debtor and the creditors.

The Court may refuse to approve the consumer proposal where it is established that the consumer

debtor:

(a) has committed any offence mentioned in sections 198 to 200 of the BIA;

(b) was not eligible to make the consumer proposal when the consumer proposal was filed with the Official Receiver.

108. The Court shall also refuse to approve the consumer proposal if the proposal does not:

(a) provide that its performance is to be completed within five years;

(b) provide for payment, in priority to other claims, of all claims directed to be so paid in the distribution of the property of the consumer debtor; and

(c) provide for payment of all fees and expenses of the Administrator on and incidental to proceedings arising out of the consumer proposal or of any person in respect of counselling provided pursuant to the BIA.



109. The approval of a consumer proposal is binding on all unsecured creditors and all secured

creditors for which proofs of claim have been filed in accordance with the BIA. Therefore, if a

secured creditor does not wish to be bound by the consumer proposal, he should not vote on the

proposal nor file a proof of claim unless certain that he has enough votes to defeat the consumer

proposal.

110. A consumer proposal which is approved by the creditors does not act to release any other

person liable on the debt owed by the consumer debtor. Therefore, a consumer proposal will not

release the guarantor or co-signer of the consumer debtor.

D. PROTECTION FOR CONSUMER DEBTORS DURING PROPOSALS

111. Once a consumer proposal has been filed, a creditor is prevented from terminating, amending

or claiming any accelerated payment under any agreement with the consumer debtor and any public

utility is prevented from discontinuing service for payment arrears by reason only that the consumer

debtor is insolvent, has filed a consumer proposal, or has failed to make payment prior to the filing of

the consumer proposal. The stay of proceedings continue until such time as the consumer proposal

has been withdraw, refused by the creditors or the Court, annulled by the Court or deemed annulled.

112. The Court may, on application by a party to an agreement or by a public utility, declare that

provisions of the Act which prevent landlords or utilities from taking action do not apply, or apply

only to the extent declared by the Court, where the applicant satisfies the Court that the operation of

the Section would likely cause it significant financial hardship.



E. CERTIFICATE OF EXECUTION

113. When a consumer proposal has been fully performed, the Administrator who is required to

give a certificate to that effect to the consumer debtor and to the Official Receiver.

IV. UNPAID SUPPLIERS, FARMERS, FISHERMEN AND

AQUACULTURISTS

A. SUPPLIERS

114. Section 81.1 of the Bankruptcy and Insolvency Act provides that a supplier has the right to

repossess, at its own expense, goods that have not been paid for and which were sold and delivered to

the purchaser, if the purchaser is bankrupt or in receivership, under the following conditions:

(a) the supplier must demand repossession, in writing, within 30 days after delivery;

(b) the purchaser is either bankrupt or in receivership;

(c) the goods must be in the possession of the purchaser, trustee or receiver, be identifiable and not fully paid for, in the same state as when delivered and must not have been resold at arm's length or subject to any agreement for sale at arm's length; and

(d) the purchaser, trustee or receiver does not pay the outstanding balance owed forthwith upon presentation of the demand.

115. The supplier's right of repossession ranks above all other statutory or common law claims to

the goods, except that of a bona fide subsequent purchaser for value without notice of the repossession

demand. The right does not preclude the supplier from resorting to any of its other rights under

provincial law, save that a supplier who repossesses goods under section 81.1 is not entitled to be paid

for those goods. Where the supplier has taken a purchase money security interest or other security,

the effect of these provisions is to extinguish any deficiency claim on the purchase price in respect of

any goods repossessed under section 81.1. If the supplier wishes to claim for a deficiency after

realization of the security, it must refrain from exercising its section 81.1 rights.


Saskatchewan: Bar Admission Program 31 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 116. Where the goods have been partially paid for, repossession of a portion of the goods delivered

will be permitted. If the partial payment made is reimbursed to the purchaser, trustee or receiver, the

supplier may repossess all of the goods. 117. The right of repossession applies only in the event of bankruptcy or receivership. It is

inapplicable to commercial proposals under the BIA. However, the commencement of a proposal

proceeding suspends the running of the 30 day period. If the proposal is ultimately defeated or

rejected by the Court, unpaid suppliers may at that time have recourse to whichever of their goods

remain identifiable, unsold, unaltered and still in the debtor's possession. 118. Once the supplier's right to repossess is conceded, he will have to repossess within ten days

unless this period is extended by mutual agreement. 119. As stated above, the supplier's right of repossession ranks ahead of any other claims. This

includes a secured creditor holding a security on after-acquired property or a secured creditor with a

purchase-money security interest in inventory. 120. If any disputes arise as to the entitlement of a supplier to repossession, the purchaser, trustee

or receiver or supplier may apply to Court taking whatever directions the Court considers proper in

the circumstances. Such disputes can be settled in a summary manner in a reasonable short period of

time.

B. FARMERS, FISHERMEN AND AQUACULTURISTS

121. Section 81.2 of the BIA grants extra protection to farmers who have sold products of

agriculture, fishermen who have sold products of the sea, lakes and rivers, and aquaculturists. These

product suppliers are granted a super priority by way of a first charge over the purchasers' entire

inventory. This remedy is in addition to the rights pursuant to the unpaid suppliers' provisions

discussed above, and any other rights they may have under provincial law.


32 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers 122. The super priority applies only to indebtedness for the products delivered within 15 days prior

to the date of bankruptcy or receivership, provided a written proof of claim is filed within the 30 days

following the bankruptcy or receivership.

123. The charge referred to above ranks above every other claim, right or charge against the

purchaser's inventory existing on the date of the bankruptcy or receivership, except a supplier's right

to repossess identifiable goods as set out above. If the trustee or receiver takes possession or disposes

of the charged inventory, the charge extends to the proceeds, net of costs of realization and the trustee

or receiver is liable for the supplier's claims to the extent of the net realizable value. The trustee or

receiver is thereafter subrogated in and to all rights of the farmer, fishermen or aquaculturists to the

extent of the amounts paid to them by the trustee or receiver.


APPENDICES


Saskatchewan: Bar Admission Program A - 1 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix A - Notice of Intention to Make a Proposal

Form 42.1 NOTICE OF INTENTION TO MAKE A PROPOSAL (Section 50.4(1)) TAKE NOTICE THAT:

1. SPRINGFIELD NUCLEAR POWER PLANT INC. of Springfield, Saskatchewan, an

insolvent person, pursuant to subsection 50.4(1) of the Bankruptcy and Insolvency Act, intend

to make a proposal to its creditors.

2. DEWEY, GOUGEM & HOWE of 123 Main Street, Springfield, Saskatchewan, S7K 1A1,

a licensed trustee, has consented to act as trustee under the proposal and a copy of the consent

is attached hereto.

3. A list of the names of the known creditors with claims amounting to $250 or more and the

amounts of their claims is attached.

4. Pursuant to section 69 of the Bankruptcy and Insolvency Act, all proceedings against me are

stayed as of the date of filing this notice with the Official Receiver in my locality.

DATED at the City of Springfield, in the Province of Saskatchewan, this 7th day of May, A.D. 1998.

SPRINGFIELD NUCLEAR POWER PLANT INC.

(seal) Per: _____________________________ Montgomery Burns Per: ______________________________


A - 2 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix A - Notice of Intention to Make a Proposal

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Saskatchewan: Bar Admission Program B - 1 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix B - Commercial Reorganization Scenario

COMMERCIAL REORGANIZATION SCENARIO

Debtor Company: Springfield Nuclear Power Plant Inc. Business: Produces and sells nuclear power; Manufactures and sells plutonium Assets:

Real Property Owned • Nuclear power plant $ 4,000,000 • Nuclear waste dump $ 1,000,000 Real Property Leased

• Main Storage Shed (Leased from Krusty Industries Ltd. for $50,000 per month) • Secondary Storage Shed (Leased from Mayor Quimby for $30,000 per month)

Equipment

• Miscellaneous Equipment $ 500,000 • Vehicles $ 100,000

Inventory

• 5000 plutonium bars @ $1000 $5,000,000

Receivables

• Miscellaneous Book Debts $ 1,000,000 ___________ TOTAL ASSETS: $11,600,000


B - 2 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix B - Commercial Reorganization Scenario

COMMERCIAL REORGANIZATION SCENARIO

Liabilities: Secured Debts

• Springfield Savings & Loan $ 5,000,000 (term debt) (secured by mortgage on nuclear power plant, GSA and personal guarantee of Montgomery Burns)

• First State Bank of Springfield $ 3,000,000 (operating loan) (secured by first charge on receivables and inventory)

• Montgomery Burns Holdings Inc. $ 1,000,000 (shareholder's loan) (secured by second mortgage on nuclear power plant)

Unsecured Debts

• Kwik-E-Mart Ltd. $ 750,000 (cafeteria supplies)

• Krusty Industries Ltd. $ 500,000 (rent arrears)

• Lionel Hutz, Barrister and Solicitor $ 100,000 (legal fees)

• Revenue Canada (Taxation) $ 750,000 (unpaid source deductions)

• 75 Miscellaneous Trade Creditors $ 1,200,000 ____________ TOTAL LIABILITIES: $12,300,000



MAY 7, 1998: NOTICE OF INTENTION TO MAKE A PROPOSAL • Montgomery Burns is the sole director and shareholder of Springfield Nuclear Power Plant Inc.

("the Company"). On May 7, 1998, he comes to see you for advice.

• Springfield Savings & Loan ("S & L") has called its $5,000,000 term loan. On April 29, 1998, S

& L served on the Company a "Notice of Intention to Enforce Security" under section 244 of the

BIA.

• First State Bank of Springfield ("the Bank") is current on its loan and seems willing to continue

to support the Company.

• The Company no longer requires the nuclear waste dump and is willing to sell it and use the

proceeds to pay creditors.

• The Company is willing to give up the lease on the main storage shed and consolidate its storage

in the secondary storage shed.

• Montgomery Burns has talked to his mother, Clara Burns, and she is willing to make an equity

investment of $1,000,000 in the Company, for 40% of the voting shares.


B - 4 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix B - Commercial Reorganization Scenario

ACTION:

• You recommend to Mr. Burns that the Company file a "Notice of Intention to Make a

Proposal" under section 50.4(1) of the Bankruptcy and Insolvency Act ("the BIA").

• You explain to Mr. Burns how the commercial reorganization process works and the

risks involved if it fails.

• As S & L served its section 244 Notice on April 29, it will be entitled to enforce its

security (and will be unaffected by any stay of proceedings) on May 9. You

recommend to Mr. Burns that the "Notice of Intention to Make a Proposal" be filed

today (May 7).

• You identify a licensed bankruptcy trustee who is prepared to act and you obtain that

trustee's written consent.

• You obtain from Mr. Burns a complete list of the creditors of the Company.

You file at the Office of the Official Receiver (by fax if necessary) the following

documents:

(i) Notice of Intention to Make a Proposal;

(ii) List of All Creditors; and

(iii) Trustee's Written Consent to Act.



MAY 7 TO JUNE 6, 1998: THE FIRST THIRTY DAYS

• On May 12, 1998, the Trustee under the Proposal (Dewey, Gougem & Howe) sends a notice to

all creditors that the Notice of Intention has been filed by the Company. • The Company prepares a cash flow report estimating its revenues and expenditures for the

30-day period from May 7 to June 6. The Trustee reviews that report and prepares the

Trustee's Report on Reasonableness of Cash Flow Statement. Both of these reports are filed

with the Official Receiver on or before May 16, 1998. • On a regular basis throughout this 30 day period, the Trustee attends at the Company's place of

business, reviews the books, reviews the weekly cash reports and monitors the business of the

Company. The Trustee reports any material adverse change in the Company's projected cash

flow to the Official Receiver. • On May 20, you attend a meeting with Mr. Burns, the Trustee, the Bank and the Bank's

lawyers. The Bank is concerned that the Company has become insolvent. You and Mr.Burns

reassure the Bank that the Company has adequate cash flow and resources to develop a

successful proposal, avoid bankruptcy and carry on business. The Bank agrees to support the

proposal if the Company can gain the support of S & L and adequate support from its

unsecured creditors. • On May 23, you meet with Mr. Burns, the Trustee, S & L and the lawyers for S & L. Mr. Burns

offers S & L the following incentives to support a proposal by the Company:

(a) the Company will sell the nuclear waste dump and pay the $1 million sale proceeds to S & L, reducing its term debt from $5 million to $4 million; and

(b) the Company will pay to S & L one half of the proposed $1 million equity investment to be made by Clara Burns.

S & L listens, but makes no commitments. They promise a response as soon as possible.


B - 6 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix B - Commercial Reorganization Scenario • By May 30, you still have not heard from S & L. You telephone their lawyers, and they tell you

that S & L will not have made its decision on your proposal until the week of June 9. You

explain that the Company's thirty-day stay of proceedings expires on June 6, and you will have

to apply to the Court for a 45-day extension. S & L indicates that it will not oppose the

Company's application for an extension.

• On June 2, you make application on behalf of the Company to the Registrar in Bankruptcy for a

45-day extension of the stay of proceedings. Your materials indicate:

(a) that the extension application is not opposed by any of the three secured creditors; and

(b) that it would be impractical to have to serve notice of the application on all of the unsecured creditors.

• On June 5, the Registrar in Bankruptcy grants an Order giving the Company a 45-day extension of

the time within which it is required to file its proposal, from June 6 to July 21, 1998.



JUNE 7 TO JULY 17, 1998: FILING AND APPROVAL OF THE PROPOSAL

• On June 5, Lionel Hutz issues a Pre-Judgment Garnishee Summons against the Company, in an

attempt to collect the $100,000 in legal fees owing to him. He claims he didn't know about the

Notice of Intention, so it's not binding on him. You apply to Court and have the Pre-Judgment

Garnishee Summons set aside.

• On June 9, S & L responds to the Company's request. It will accept the proposal on the terms

suggested, provided that it also obtains a first mortgage on Montgomery Burns' mansion and a

$50,000 "administration fee" for its trouble. Mr. Burns reluctantly agrees.

• On June 14, you meet with Mr. Burns and the Trustee and develop the following draft proposal:

Secured Creditors: S & L: S & L will get $1 million in sale proceeds from the nuclear waste dump, $500,000

from Clara Burns' equity investment; a first mortgage on Montgomery Burns' mansion, a $50,000 administration fee, and its existing security, in exchange for its agreement to reinstate its term debt (at a reduced level) to current status.

The Bank: The Bank will keep its existing security, and it will receive a mortgage on the

nuclear power plant and a postponement from Montgomery Burns Holdings Inc. of its second mortgage on the nuclear power plant, in exchange for continuing to provide the Company with the Operating Loan.

Montgomery Burns Holdings Inc. Will keep its existing security, but will give a

postponement of its mortgage on the nuclear power plant to the Bank.


B - 8 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix B - Commercial Reorganization Scenario Unsecured Creditors: The Company will disclaim its lease of the Main Storage Shed, and will consolidate its storage in

the Secondary Storage Shed. It will pay to Krusty Industries Ltd. the six months' rent arrears owing to it immediately upon court approval of the proposal.

The Company will pay the $750,000 in unpaid source deductions owing by it to Revenue Canada within six months of court approval of the proposal.

The other $500,000 of the equity investment made by Clara Burns will be paid to the remaining unsecured creditors on a pro rata basis, entitling them to approximately $0.21 on the dollar on their claims. In addition, they will each receive Class "B" non-voting preferred shares of the Company, entitling them to a share of future profits, in an amount equal to $0.29 worth of Class "B" preferred shares for each dollar of unsecured debt owed to them.

• On June 15, you circulate the draft proposal to the secured creditors and the major unsecured

creditors. Except for Lionel Hutz, all of these creditors indicate that they will support the proposal.

• On June 19, you file the proposal with the Official Receiver, along with the Company's cash flow

statement and the Trustee's report.

• The Trustee schedules the first meeting of creditors for July 8. On June 26, he sends a copy of the

proposal and notice of the meeting to all creditors of the Company.

• At the meeting of creditors on July 8, all secured creditors approve the proposal. All unsecured

creditors except Lionel Hutz approve the proposal. The proposal is deemed to be accepted by the

creditors.

• The Trustee applies to Bankruptcy Court for Court approval of the proposal. Over the vigorous

objections of Lionel Hutz, the Bankruptcy Court approves the proposal.

• The Company successfully performs the proposal and carries on business. As a result, 100 jobs and

an annual payroll of $35 million are preserved for the Community of Springfield. Mr. Burns is

extremely grateful and recommends you to all of Springfield's business elite.


Saskatchewan: Bar Admission Program C - 1 Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix C - Commercial Reorganization Procedural Flow Charts - Chart 1 Notice of intention to file a

proposal

Possibility of

interim receiver Filing with O.R. with

name of Trustee & list of creditors

Trustee reviews cash flow

statement

Yes

No Filed with Notice

of Intention

Cash flow statement prepared?

Filed within 10 days

Notice by trustee to creditors within 5 days

Court can extend

time up to six months in segments of

45 days

Upon filing of notice of intention: - stay of proceedings for 30

days; - Trustee monitors the affairs

of the debtors

Trustee reports forthwith any

material adverse change

Trustee, creditor or interim receiver may ask

court to cancel stay of proceedings

The trustee helps to prepare proposal

Yes

No

No Proposal (Chart 2)

Proposal filed with O.R. within 30 days

Extension of time requested?

Bankruptcy

Yes Court can extend time

up to six months in segments of 45 days

Reproduced with permission from materials prepared by Consumer and Corporate Affairs Canada, Office of the Superintendent of Bankruptcy for “Insolvency Information Sessions”, October, 1992.

Reproduced with permission Not to be used or reproduced without permission - August 2004 - Saskatchewan Legal Education Society Inc.

C - 2 Saskatchewan: Bar Admission Program Debtor Creditor - Commercial Reorganizations, Consumer Proposals and Unpaid Suppliers Appendix C - Commercial Reorganization Procedural Flow Charts - Chart 2 Proposal Part III Division I

Trustee monitors until

court approval or bankruptcy

Proposal is filed with O.R.

DOCUMENTS TO BE FILED: - Cash flow or revised cash-

flow; - report of trustee on

reasonableness of cash flow; - statement of affairs

O.R. issues certificate of filing

of proposal & decides who chairs meeting

Interim Receiver

possibility

Notice to creditors 10 days before the

meetings

Documents to include: - condensed statement;

- list of creditors; - proof of claim;

- proxy; - voting letter;

- trustee’s report

First Meeting

Included secured creditors can vote by

classes

No Proposal accepted?

Bankruptcy

Yes

No Ratification by the court

Bankruptcy

Yes

No

Terms of proposal met?

Notice by trustee to O.R. & creditors within 60 days of

default. Possible application to annul the proposal

Yes

No Certificate of compliance

Annulment?

R & D Trustee’s discharge

Yes R & D Trustee’s

discharge Bankruptcy

Reproduced with permission from materials prepared by Consumer and Corporate Affairs Canada, Office of the Superintendent of Bankruptcy for “Insolvency Information Sessions”, October, 1992
