Electronic copy available at: http://ssrn.com/abstract=1309703 Electronic copy available at: http://ssrn.com/abstract=1309703 Electronic copy available at: http://ssrn.com/abstract=1309703
Realigning Insolvency’s Orphan to the Modern
Law Reform Process
Thomas G.W. Telfer & Bruce Welling*
TheWinding-Up and Restructuring Act (WURA)is an important part of Canada’s insolvency law structure. Insolvent banks and insurance companies may only be liqui-dated underWURA and are excluded from the Bankruptcy and Insolvency Act (BIA)
and theCompanies’ Creditors Arrangement Act (CCAA).However,WURAhas been neglected and many of its provisions reflect its nineteenth century origins. The most recent round of insolvency reforms in S.C. 2005, c. 47 and S.C. 2007, c. 36 do not make any substantive changes toWURA. BIAandCCAAhave been modernized over time;
WURAis the orphan of insolvency law reform.
The article examines whetherWURAshould remain a distinct statute and if so, whether it should be limited to financial institutions. The article considers specific areas of reform in relation to pre-bankruptcy transactions, the role of inspectors, preferred claims and Crown priority.
LaLoi sur les liquidations et les restructurations (la « LLR ») constitue un e´le´ment important dans l’e´chiquier des lois relatives a` l’insolvabilite´ au Canada. Les banques et les socie´te´s d’assurances insolvables ne peuvent eˆtre liquide´es qu’en vertu de la LLR; elles sont exclues de l’application de laLoi sur la faillite et l’insolvabilite´(la « LFI ») et de laLoi sur les arrangements avec les cre´anciers des compagnies(la « LACC »). Toutefois, la LLR n’a pas e´te´ tenue a` jour et bon nombre de ses dispositions refle`tent ses origines qui remontent au dixneuvie`me sie`cle. La dernie`re ronde de re´formes en matie`re d’insolvabilite´, pre´vue dans L.C. 2005, c. 47 et L.C. 2007, c. 36, n’entraıˆne pas de modifications de fond de la LLR. La LFI et la LACC ont e´te´ modernise´es avec le temps mais la LLR est l’oublie´e de la re´forme du droit en matie`re d’insolvabilite´. Les auteurs traitent de la pertinence pour la LLR de demeurer une loi distincte et se demandent si on devrait en limiter l’application aux institutions financie`res. Ils proposent de plus certaines re´formes dans le domaine des ope´rations ante´rieures a` la faillite, du roˆle des inspecteurs, des cre´ances prioritaires et des priorite´s de la Couronne.
Electronic copy available at: http://ssrn.com/abstract=1309703 Electronic copy available at: http://ssrn.com/abstract=1309703 Electronic copy available at: http://ssrn.com/abstract=1309703
1. INTRODUCTION
TheWinding-Up and Restructuring Act1(WURA) has been left out of the insolvency law reform process.WURA’sroots can be traced to the nineteenth century; many of its provisions have not been changed since then. Insolvent financial institutions such as banks, trust companies and insurance companies must useWURA. However, there has been no attempt to locate the Act in a broader insolvency law framework since 1970.2None of the 20053and 20074insolvency law amendments makes any substantive change toWURA. Many practitioners recommended it be amended, but the Senate concluded in 2003 that “[t]his Act is not subject to the current statutory Parliamentary review.”5
We consider some reform recommendations in this article.Part 2 describes the origins ofWURA,its general purpose and scope, and asks whether the present insolvency law structure, which encompasses the Bankruptcy and Insolvency Act6(BIA), the Companies’ Creditors
Ar-rangement Act7 (CCAA) and WURA, could be replaced by a single statute. Part 3 addresses specificWURAreform issues.
2. ORIGINS, PURPOSE, SCOPE, AND THE FUTURE OF
WURA
(a) Origins of WURA
Why do we have bothWURAandBIA? The separate regimes have 19th century roots. Shortly after Confederation, Parliament passed the
1 R.S.C. 1985, c. W-11.
2 Report of the Study Committee on Bankruptcy and Insolvency Legislation(Canada, 1970) [Tasse´ Report].
3 Bill C-55,An Act to establish the Wage Earner Protection Program Act, to amend the
Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, 38th Parl., 1st Sess., 2005 (assented to 25 November 2005) S.C. 2005, c. 47 s. 1 [Statute c. 47] [not yet in force].
4 Bill C-12,An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors
Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005, 39th Parl., 2nd Sess., 2007 (assented to 14 December 2007) S.C. 2007, c. 36 [Statute c. 36] (not yet in force). See Jacob Ziegel, “A Flawed Insolvency Law Reform Process” (2008) 46 Can. Bus. L.J. 1 [Ziegel 2008].
5 Report of the Standing Committee on Banking, Trade and Commerce,Debtors and
Cred-itors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Com-panies’ Creditors Arrangement Act (Ottawa: Senate of Canada, 2003) at 202 [Senate Report:Sharing the Burden].
Insolvent Act of 1869.8Six years later came theInsolvent Act of 1875.9 That federal foray into bankruptcy and insolvency was short-lived. In 1880, Parliament repealed theInsolvent Act of 1875, leaving the country without a general insolvency statute.10
Shortly after repealing the general insolvency legislation, Parlia-ment debated the more narrowly focusedInsolvent Banks and Insurance Companies Winding-Up Bill.11That Bill wasn’t enacted. In it, however, Parliament recognized that banks and insurance companies were differ-ent from ordinary trading companies. The capital structure of banks and insurance companies was unique, and more money flowed through them than through other types of corporations.12
In 1882, Parliament passed broader legislation –An Act Respecting Insolvent Banks, Insurance Companies Loan Companies, Building So-cieties and Trading Corporations13 – “for the purpose of winding-up insolvent banks, and insolvent trading companies.”14Curiously, from a 21st century perspective, Parliament saw the problem in terms of insol-vent corporations, not in terms of insolvency and not including insolinsol-vent individuals. The focus was on terminating the existence of insolvent bodies corporate, but the earlier realization – that banks and insurance companies were different – seems to have been forgotten. The 1882 statute was based on English statutes as well as provisions from the earlier CanadianInsolvent Acts.15It was re-named theWinding-Up Act in 1886.16More recently, the name was changed toWURA.
In 1919, Parliament enacted Canada’s first general Bankruptcy Act.17There was no attempt to incorporate the provisions of the
Winding-Up Actinto theBankruptcy Actframework. TheBankruptcy Actapplied to both individuals and corporations; the Winding-Up Act applied to insolvent bodies corporate. Thus after 1919 “there were, in effect, two
8 S.C. 1869 (32-33 Vict.) c.16. 9 S.C. 1875 (39 Vict.) c.16. 10S.C. 1880 (43 Vict.), c. 1.
11House of Commons Debates, vol. 9 (8 April 1880) at 1228 (Mr. Abbott). 12Ibid.
13S.C. 1882 (45 Vict.) c. 23.
14Debates of the Senate of Canada(1 March 1882) at 34 (Hon. Sir Alexander Campbell). 15Ibid.
16R.S.C. 1886, c. 129.
separate Acts in competition with each other in relation to the insolvency of limited liability companies.”18
The dual regime was restricted somewhat in 1966. Parliament amended theBankruptcy Actand gave bankruptcy proceedings prece-dence over theWinding-Up Act.19Beyond that there has been no attempt to address the obvious, two-part question. ShouldWURAbe integrated into an enlargedBIA, or shouldWURAbecome a narrower, specialized statute?
(b) Purposes of WURA
The purpose ofWURA is to “wind up, finally, the affairs of the company as inexpensively and speedily as possible, in the interests of creditors, and all others concerned in it.”20
The proceedings take on a collective nature: those with claims against the company are confined to remedies found in the Act. An application for a winding-up order precludes creditors from enforcing their individual claims outside the winding-up proceeding “and substi-tutes the right to participate pari passu in a distribution of dividends.”21 Thus, an important purpose of the Act is to:22
get within the control of one Court all of the estate of the insolvent company and to settle there all claims against the estate in the simplest and least expensive way and to distribute the assets amongst the creditors in the quickest way possible without incurring needless expense by litigation in other Courts.
The central winding-up proceeding avoids the “piecemeal realiza-tion of the debtor’s assets and an unequal distriburealiza-tion of those assets” that might otherwise occur.23The Supreme Court of Canada recently 18Tasse´ Report,supra,n. 2 at para. 1.2.05.
19SeeBIA,supra,n. 6, s. 213.
20J. McCarthy & Sons Co., Re(1916), 38 O.L.R. 3, 32 D.L.R. 441 (Ont. C.A.) at 445-46;
Canada Deposit Insurance Corp. v. Commonwealth Trust Co.(1992), [1992] B.C.J. No. 3006, 34 C.B.R. (3d) 277, 1992 CarswellBC 880, 17 B.C.A.C. 201, 29 W.A.C. 201 (B.C. C.A. [In Chambers]) at para. 20.
21J. Carfagnini, “Proceedings Under the Winding-Up Act (Canada)” (1988) 66 C.B.R. (N.S.) 77 at para. 5. The collective nature of the Act is reinforced by s. 21 which provides for a stay of proceedings:Canada (Attorney General) v. Reliance Insurance Co.(2007), 2007 CarswellOnt 6391, 54 C.C.L.I. (4th) 204, 87 O.R. (3d) 42, 36 C.B.R. (5th) 273 (Ont. S.C.J. [Commercial List]).
22Toronto Wood & Shingle Co., Re(1894), 30 C.L.T. 353;Home Assurance Co. of Canada
(No. 2), Re, 1949 CarswellAlta 2, [1949] 1 W.W.R. 656, 16 I.L.R. 56, [1949] 2 D.L.R. 382, 29 C.B.R. 236 (Alta. T.D.), at 393 [D.L.R.].
held that the winding-up procedure allows “for the closing down of the company’s business in an orderly and expeditious manner while mini-mizing, as far as possible, the losses and harm suffered by both the creditors and other interested parties and by distributing the assets in accordance with the Act.”24
The assumption is thatWURAshould be designed to maximize the aggregate wealth of creditors and shareholders.25 However, WURAis now used primarily by financial institutions. More specific purposes of the Act need to be recognized. Financial institutions are different from other business corporations. The failure of a financial institution may have systemic effects on the financial sector. Government officials should have a role in the initiation of winding-up proceedings under WURA.26
The capital structure of financial institutions is also different. There are usually many creditors with small claims. In Canada (Attorney General) v. Confederation Life Insurance Co.the court recognized that WURAhad a more focused and specialized purpose in the context of a winding-up of an insurance company. WURA’s regulatory scheme in that situation is designed to protect the interests of policyholders.27But there are also insurance and compensation providers, one of whom may have a large stake in a winding up. It is important to “ensure that the
24Coope´rants, Socie´te´ mutuelle d’assurance-vie c. Raymond, Chabot, Fafard, Gagnon Inc., 1996 CarswellQue 369, 1996 CarswellQue 369F, [1993] A.Q. No. 2213, EYB 1996-67896, 39 C.B.R. (3d) 253, (sub nom.Dubois v. Coope´rants (Les), Socie´te´ mutuelle d’assurance-vie (Liquidation)) 196 N.R. 81, (sub nom.Coope´rants, Mutual Life Insurance Society (Liquidator of) v. Dubois) 133 D.L.R. (4th) 643, (sub nom.Coope´rants, Mutual Life Insurance Society (Liquidator of) v. Dubois) [1996] 1 S.C.R. 900 (S.C.C.);Maritime Bank v. Troop(1889), 16 S.C.R. 456, 1889 CarswellNB 77 (S.C.C.);Ince Hall Rolling Mills Co. v. Douglas Forge Co., 1881 WL 18643, (1881-82) LR 8 Q.B.D. 179 at 184;Wiarton Beet Sugar Co., Re(1905), 10 O.L.R. 219 at 223 (Ont. H.C.);Queen City Refining Co., Re
(1885), 6 C.L.T. 89; affirmed (1885), 10 O.R. 264 (Ont. H.C.).
25The Winding Up and Restructuring Act: Recommendations for Reform(A Report of the Insolvency Institute of Canada, 2000) at 4 [IIC Report].
26SeeWURA,supra,n. 1, s. 10.1.
(WURA) permits insurers and compensation providers to play an effec-tive role in the administration of firms being wound-up.”28
(c) Scope of WURA and Interaction with other Statutes
(i) WURA and Corporate Law
WURAapplies only to corporations. However, it has never been updated to take account of post-19th century notions of what a corpo-ration is.29Section 6extendsthe scope ofWURAto financial institutions. The Act also applies to “incorporated trading companies doing business in Canada wherever incorporated.” The concept of “trading companies” is defined inWURAsection 2. The definition has remained unchanged since the 19th century.30
“trading company” means any company, except a railway or telegraph company, carrying on business similar to that carried on by apothecaries, auctioneers, bank-ers, brokbank-ers, brickmakbank-ers, buildbank-ers, carpentbank-ers, carribank-ers, cattle or sheep salesmen, coach proprietors, dyers, fullers, keepers of inns, taverns, hotels, saloons or coffee houses, lime burners, livery stable keepers, market gardeners, millers, miners, packers, printers, quarrymen, sharebrokers, ship-owners, shipwrights, stockbro-kers, stock-jobbers, victuallers, warehousemen, wharfingers, persons using the trade of merchandise by way of bargaining, exchange, bartering, commission, consignment or otherwise, in gross or by retail, or by persons who, either for themselves, or as agents or factors for others, seek their living by buying and selling or buying and letting for hire goods or commodities, or by the manufacture, workmanship or the conversion of goods or commodities or trees;
The definition includes a list of conceivable business activities one would find in the Articles of Association of an English-model registra-tion companycirca1890. Canadian business corporations moved away from that model decades ago. Canadian corporate statutes now enact much simpler provisions, generally enabling corporations to engage in any business activity that a human individual could.31Most Canadian business corporations are no longer required to give public notice, or seek expensive charter amendments, when they decide to abandon their
28IIC Report,supra,n. 25 at 3.
29R. Wood & T. Buckwold, “Priorities” in S. Ben-Ishai & A. Duggan, eds.,Canadian
Bankruptcy and Insolvency Law: Bill C-55, Statute c. 47 and Beyond(Toronto: LexisNexis, 2007) 101 at 103 (pervasive problem withWURAis “statutory obsolescence”) [Priorities]. 30WURA,supra,n. 1, s. 2. Seee.g., Winding-Up Act, R.S.C. 1886, c. 129, s. 2(c).
previous business pursuits as “fullers” or “wharfingers” (both onWURA list) and enter the airline business or pursue e-commerce over the Internet (both missing).
WURA says it applies generally to “trading companies”. Other statutes impose limits on that apparent scope. One example is section 3(3)(b) of theCanada Business Corporations Act(CBCA): it says that WURAdoes not apply to corporations incorporated or continued under theCBCA.32InsolventCBCAcorporations may only be liquidated under
BIA.33
Not all federal corporations are incorporated under theCBCA. Non-business corporations, for example, are incorporated under theCanada Corporations Act, an old-style letters patent statute. Some federal cor-porations are incorporated under Special Acts, for specified federal purposes.34Those letters patent and Special Act corporations are subject toWURA.35
Corporations incorporated under provincial law may also be subject toWURA, but only if they are insolvent.36Solvent provincial and federal corporations must be liquidated and dissolved under the relevant pro-vincial or federal corporation statutes. However, solvent federal com-panies incorporated under theCanada Corporations Actmay only be wound-up underWURA.37We haven’t looked at all the federal Special
32Ibid., s. 3(3)(b). The limitation found in s. 3(3) of theCBCAdoes not diminish the usefulness ofWURAas s. 3(4) of theCBCAprohibitsCBCAcorporations from carrying on the business of banking, business to which theInsurance Companies Actapplies, or business to which theTrust and Loan Companies Actapplies. In contrastWURA’sscope extends to banks, insurance companies and trust companies. As discussed below, an insolvent financial institution may only be wound up underWURA.
33SeeCBCA,ibid., s. 208. See also Kevin McGuiness,The Law and Practice of Canadian
Business Corporations(Toronto: Butterworths, 1999) at 1231.
34Petro-Canada was one of them, incorporated under its own Act to give the Federal Crown a role in Canadian oil development during a time of perceived crisis. Petro-Canada has since become aCBCAcorporation.
35Harry Sutherland,Fraser and Stewart’s Company Law of Canada, 6th ed. (Toronto: Car-swell, 1993) at 779.
36Seee.g., Cramp Steel Co., Re(1908), 16 O.L.R. 230 (Ont. H.C.);Empire Timber, Lumber
& Tie Co., Re(1920), 1920 CarswellOnt 4, 1 C.B.R. 370, 48 O.L.R. 193, 55 D.L.R. 90, 19 O.W.N. 29 (Ont. S.C.);North American Lumber Co., Re(1921), 1921 CarswellOnt 30, 2 C.B.R. 145, 20 O.W.N. 232 (Ont. S.C.).Cf. Colonial Investment Co. of Winnipeg, Re
(1913), 1913 CarswellMan 320, 5 W.W.R. 822, 23 Man. R. 871, 15 D.L.R. 634, 26 W.L.R. 361 (Man. C.A.).
Act corporations out there to see whether any of them has its own winding-up or dissolution provisions.38WURAneeds to be amended to clarify to what corporations it applies.39
(ii) WURA and BIA
WURAandBIAhave similar functions. Both are used to liquidate or wind-up insolvent corporations.40However, the definition of corpo-rations in section 2 ofBIAexcludes, among others, “banks, authorized foreign banks within the meaning of section 2 of theBank Act, insurance companies, trust companies, [or] loan companies.” These institutions may only be wound up underWURA.
However, some corporations remain eligible under bothBIAand WURA. Section 213 ofBIAprovides thatWURAdoes not apply if any proceedings have been commenced under BIA regarding a particular corporation. Further, any proceedings that had already been commenced underWURAare deemed to abate.41BIAsection 213 thus enables cred-itors to remove insolvent companies from the operation of WURAby commencing proceedings underBIA.42An obvious question arises: is there any reason to give creditors of some corporations a choice of alternate regimes?
(d) The Future of WURA
(i) First Possibility: Merge with BIA
Suggestions for repeal ofWURAand its incorporation into a new BIAdate back to the Tasse´ Committee Report of 1970. The Tasse´ Report
38There is a technical distinction between “winding-up” and “dissolution”. A “winding-up” process is similar to the “administration and succession” process in the case of an individual who has died. “Dissolution” is the corporate equivalent of human death. See F.W. Wegenast,
The Law of Canadian Companies(Toronto: Burroughs & Company, 1931) at 101. 39In 1995 the Insolvency Institute of Canada recommended that s. 7 ofWURAbe amended
to correspond with s. 3(3) of theCBCAso as to more clearly identify which corporations fell within the scope ofWURA. See D. Baird & L. Caplan, “Bill C-100 and its Effect on Insolvencies of Financial Institutions” (1995) I.I.C. Art. 1995-8 at 8.
40As we have seen already, not all corporations are within the scope ofWURA. See, for example, s. 3(3)(b) of theCBCAdiscussed above. Sutherland,supra,n. 35 at 774. 41Section 213BIAis further subject to a disposition as to costs ofWURAproceedings to be
made in the bankruptcy proceedings underBIA.
suggested that a multiplicity of statutes leads to inefficiency and ineq-uity, as “the debtor and creditor sometimes have the choice of the system under which to proceed and, under certain circumstances, they can fare better under one system than another.”43The Tasse´ Report recommended that there be a single, comprehensive statute governing the liquidation of insolvent companies. The Committee recommended integrating the insolvency system by creating a new bankruptcy statute with “special provisions relating to the insolvency of banks, railways and insurance companies now found in other federal legislation.”44
Between 1975 and 1984 six bills were introduced to reform Ca-nadian bankruptcy law in accordance with some of the recommendations of the Tasse´ Report. The bills included proposals to create a new com-prehensive insolvency statute and to make WURA applicable only to solvent corporations. Major reform was delayed until 1992 and 1997. However, consolidation ofWURAandBIAdid not occur.45
There are many arguments in favour of consolidating the two stat-utes. As we detail below, there are many parallel provisions inBIAand WURA. Many of them are differently worded or have different effects. Further, there are substantive legal differences which set the two Acts apart.46Should creditors’ substantive rights turn on whether the insolvent debtor is subject to bankruptcy or winding-up proceedings?47
IfBIAandWURAwere consolidated, special rules relating to banks and insurance companies could be retained in separate parts of the new Act. Financial institutions could then take advantage of the general provisions ofBIAwhere applicable but rely on special provisions more suited to financial institutions. That is how Securities Firm Bankruptcies are isolated in Part XII ofBIA.
43Tasse´ Report,supra,n. 2 at para. 1.2.37. 44Ibid.,at para. 3.2.102.
45Corporate Law Policy Directorate: Other Business Insolvency Issues,supra,n. 37 at 5. 46For example the Supreme Court of Canada emphasized the legal differences in relation to
how property is held in a bankruptcy underBIAand a winding up underWURA.According to the Court there is a significant legal difference between the status of a trustee in bank-ruptcy and a liquidator on the issue of the holding of property.Coope´rants, Socie´te´ mutuelle d’assurance-vie v. Raymond, Chabot, Fafard, Gagnon Inc.,supra,n. 24 at paras. 27-34; J. Auger & A. Bohe´mier, “The Status of the Trustee in Bankruptcy” (2003) 37 R.J.T. 57;
Partington v. Cushing(1906), 1 E.L.R. 493, 3 N.B. Eq. 322 at 324, 1906 CarswellNB 71 (N.B. S.C.).
However, we recognize that there have been political obstacles to the integration ofBIAandWURA. The absence of consolidation reforms since 1970 suggests that such obstacles remain. Further, Canadian in-solvency practitioners have debated for some time whether BIA and CCAAshould be consolidated into a single regime. The outcome of that debate is now clear. In 2001, an Industry Canada report acknowledged that while a singleBIA/CCAA regime would eliminate administrative complexities and forum shopping, a single statute was not necessarily the optimal choice. The report recommended the retention of a dualBIA/ CCAAregime.48In 2003, the Standing Senate Committee on Banking, Trade and Commerce recommended that BIAand CCAA continue to exist as separate statutes.49 Reform has proceeded on this basis with separate substantive amendments toBIAandCCAAfound inStatute c. 47andStatute c. 36.50Based on that outcome, the prospects for consol-idatingBIAandWURAappear dim.
(ii) Second Possibility: Limit the Scope of WURA to Financial Institutions
If consolidation is not possible, an alternative reform would involve limiting the scope ofWURAto preclude overlap withBIA.51
Some corporations may be wound up under eitherBIAorWURA. WURAhas evolved into a more specialized regime for winding-up fi-nancial institutions, but its scope still extends to a wide range of other corporations by virtue of section 6. Financial institutions may only be wound up underWURA. Is there any reason whyWURAshould not be restricted to insolvent financial institutions?52More recent legislative reforms have tailoredWURA for financial institutions. WURAallows
48Corporate Law Policy Directorate,Efficiency and Fairness in Business Insolvencies (Ot-tawa: Industry Canada, 2001) at 53-56.
49Senate Report:Sharing the Burden,supra,n. 5 at 173.
50Jacob S. Ziegel, “The Travails of Bill C-55” (2005) 42 Can. Bus. L.J. 440 [Ziegel 2005] Ziegel 2008,supra,n. 4.
51Jacob Ziegel, in a 1999 paper, urged Parliament to consider the “repeal of theWinding-up
and Restructuring Actor its restriction to financial institutions and other special-type enterprises requiring separate treatment”.Jacob S. Ziegel, “The Modernization of Canada’s Bankruptcy Law in a Comparative Context” (1999) 4 C.B.R. (4th) 151 at 186-87 [Ziegel 1999].
for regulator intervention and court controls. It offers a more appropriate winding-up regime for financial institutions.53
The Insolvency Institute of Canada recommended in a 2000 report thatWURAshould “apply exclusively to financial institutions.” The IIC concluded that such a change would cause few problems as other insol-vent corporations could proceed underBIAorCCAA.BIAandCCAA are better suited to non-financial corporations. BIA gives creditors a larger role; WURAoffers more court supervision. The IIC concluded thatWURAwas more suited to situations involving a large number of creditors who were “incapable of representing their interests effectively without the assistance of the Court.”54
In 2001, an Industry Canada report reached a similar conclusion. It recommended limiting WURA to financial institutions. The report identified “statute shopping” as a problem. The overlappingWURAand BIAprovisions “[opened the] door to limited abuse by giving parties to a liquidation the incentive to take advantage of the differences between the two regimes.” A party might be encouraged to seek a higher priority right or “more favourable fraudulent preference treatment under one regime or the other.”55
Restriction to financial institutions would necessitate amendments to a few other corporate law statutes that omitted winding-up provisions becauseWURAwas there.56
3. SPECIFIC REFORMS NEEDED
(a) Harmonization of Parallel Provisions in BIA and WURA
If WURA were to be restricted to financial institutions, several modernizing changes would be required. Financial institutions require
53Corporate Law Policy Directorate: Other Business Insolvency Issues,supra,n. 37 at 5; IIC Report,supra,n. 25 at 4.
54IIC Report,supra,n. 25 at 4. The IIC also recommended that the list of financial institutions to whichWURAapplies should include credit unions with total liabilities in excess of $100 million. TheCanada Corporations Actwould need to be amended to provide for liquidation and dissolution (while solvent) of all federal non-financial corporations currently subject toWURA.
55Corporate Law Policy Directorate: Other Business Insolvency Issues,supra,n. 37 at 8. 56The IIC identified the following: Special Acts of Parliament; Special Acts of the Legislative
some distinctWURAprovisions. However,WURAhas not been regularly and systematically reviewed. ManyWURAprovisions are deficient com-pared to similar or parallel provisions inBIA. It would make sense to harmonize some of them.
Obvious candidates for harmonization include (i) Pre-Liquidation Transactions, (ii) Powers of Inspectors, (iii) Preferred Creditors and Priorities, (iv) Crown Claims, and (v) Reorganizations.
(i) Pre-Liquidation Transactions
Before liquidation a corporate debtor might enter into transactions that could prejudice creditors in the liquidation proceeding. The corpo-rate debtor might transfer property for little or no payment. Alternatively, the corporation might make a preferential payment to a favoured cred-itor. These two types of transactions – commonly known as a fraudulent conveyance (including a gift or a transfer at undervalue) and a fraudulent preference – are prohibited in most bankruptcy and winding-up statutes. However, there isn’t a universal statutory formula enabling a trustee in bankruptcy or liquidator to set them aside.
BIAandWURAenact provisions to deal with these two types of transactions.57The parallel provisions have the same purpose in mind.58 However, they are differently worded. Further, the WURAprovisions dealing with gifts, transfers at undervalue and preferences set out few limitation periods.59In contrast,BIAprovisions all have specific limi-tation periods that limit how far back in time a trustee may investigate pre-bankruptcy transactions.60
WURAcould be amended to conform to the amendedBIA provi-sions on transfer at undervalue61and preferences. In particular one might 57See generally:Royal Bank v. Pioneer Trust Co. (Liquidator of), 1988 CarswellSask 20, [1988] 4 W.W.R. 175, 68 C.B.R. (N.S.) 124, (sub nom.Royal Bank v. Pioneer Trust Co. (Liquidation)) 67 Sask. R. 146 (Sask. Q.B.).
58The court inRoyal Bank v. Pioneer Trust, ibid.,at para. 9,concluded that the each of the provisions in ss. 96-102 ofWURA“has as its object the obtaining or preserving of the assets for the benefit of creditors.”
59WURA, supra,n. 1, ss. 98 (30 day period), 100(2).WURAcreates a presumption that the transaction was made in contemplation of insolvency if made within 30 days.
60BIA, supra,n. 6, ss. 95 (preference 3 months or 1 year), 96 (transfer at undervalue [1 or 5 year period]) as am. byStatute c. 47andStatute c. 36.
harmonize the limitation periods and adoptBIAreview periods as the relevant standard for pre-liquidation transactions underWURA. How-ever, do the special circumstances of financial institutions warrant a longer limitation period forWURA? In recommending a longer review period for pre-liquidation transactions in WURA, the IIC opined that directors and managers of a financial institution “have more opportu-nities to obtain personal benefits at the expense of creditors than their counterparts in other types of enterprises.”62However, we see no justi-fication for the current unlimited review period available to a liquidator under the current version ofWURA. Surely a fixed review period could be legislated to bringWURAinto line withBIA.63
Both statutes prohibit gifts and other transfers at undervalue. The statutory provisions are quite different, andWURAwill be even more out of date once the new transfer at undervalue provisions inBIAcome into force.64These statutory differences will inevitably lead to different outcomes. While the courts will be working out the parameters of a transfer at undervalue underBIA,liquidators will be left to deal with the nineteenth century language inWURA.Some corporations remain
eli-62See K. Davis, “The Winding-Up and Restructuring Act and the Bankruptcy and Insolvency Act: A Comparative Analysis” (Paper presented at the Annual Meeting of the Insolvency Institute of Canada, Banff, 29-31 January 1999) at 19.
63IIC Report,supra,n. 25 at 10.
64There are too many details to cover in this article, but here are some highlights. (1) Section 96 of the amendedBIAwill create a new “transfer at undervalue” provision replacingBIA
gible under both statutes. There is no compelling reason for outcomes on gifts or transfers at undervalue to depend on the choice of statute.
Similarly, bothBIAandWURAdeal with preferences.WURA pro-visions on unjust preferences remain trapped in the nineteenth century; BIApreference provisions have been modernized byStatute c. 36.WURA section 100, which deals with unjust preferences, is based almost entirely on the wording found in theInsolvent Act of 1875,65which was repealed in 1880,66but provided the model for the preference provisions in the originalWinding-Up Actof 1882. These nineteenth century provisions largely focus on the intention of the debtor. In contrast, recent changes toBIAwill allow the court in some circumstances to focus its inquiry on the overall effect of the transaction.
UnderBIA,the review period is three months for transactions at arm’s length. The amendments do not affect the legal test for this type of transaction. Section 95(1)(a) applies only if the debtor intended to prefer one creditor over another. However, section 95(2) enables the trustee to rely on a presumption that the debtor entered into the trans-action with a view to giving one creditor a preference.67 The historic attachment to an intention-based regime has been abandoned by the recent amendments toBIAfor transactions with a creditor who is not dealing at arm’s length. Section 95(1)(b) provides that if the transaction had theeffectof giving that creditor a preference over another creditor the transfer is void. Under the revisedBIAintention will no longer be relevant for non-arm’s length transactions.
Section 100 ofWURAapplies only if “that creditor obtains or will obtain an unjust preference over the other creditors.” A liquidator may seek to set aside certain transfers of property by a company “in contem-plation of insolvency.” The phrase “in contemcontem-plation of insolvency” has been held to mean with the intention to defeat the equal distribution of
65S.C. 1875, c. 39. CompareWURAs. 100 and s. 133 of theInsolvent Act of 1875. Many of the other pre-liquidation provisions appear to be based upon theInsolvent Actof 1875. (s. 96WURAand s. 130Insolvent Act of 1875) (s. 97WURAand s. 132Insolvent Act of 1875) (s. 98WURAand s. 131Insolvent Act of 1875) (s. 101WURAand s. 134Insolvent Act of 1875).
66S.C. 1880, c. 1.
67The presumption arises if the trustee establishes three elements: (i) the transaction took place within 3 months of the bankruptcy, (ii) the debtor was insolvent at the time of the transaction, and (iii) the transaction in fact gave the creditor a preference:Van der Liek, Re
creditors.68Section 100(2) creates a presumption that the transaction was made in contemplation of insolvency if it was made within 30 days of the commencement of the winding-up proceeding. Since section 100 of WURAis based on an intention-based test, only voluntary transfers can be set aside. Pressure negates the voluntary nature of the transaction. Section 100(2) precludes the operation of the doctrine of pressure but only if the transaction took place within 30 days.69Thus the doctrine of pressure, which if established allows the creditor to retain the payment, will still apply if the transaction took place outside the 30 day period.70 ContrastBIAsection 95(2) which abolishes the doctrine of pres-sure.71Section 95(2) simply asks whether the transaction with the arm’s length creditor was made with a view to giving a creditor a preference over other creditors “whether or not it was made voluntarily or under pressure and evidence of pressure shall not be admissible to support the transaction.” There is no public policy reason for having a different approach under theWURAandBIA.72
WURAprovisions enabling a liquidator to challenge pre-liquidation transactions are deficient. There are many inconsistencies betweenBIA provisions and the provisions inWURAthat relate to transfers at under-value and preferences.73Since the enactment ofWURAthere has been no attempt to harmonize its pre-liquidation provisions with those inBIA.
In 1997, Professor Ron Cuming recommended a reformulated sec-tion 95 forBIA, which he suggested could replaceWURAsection 100-102.74In 1996, the IIC concluded thatBIApreference provisions “have been more thoroughly tested in practice and [are] the subject of far more extensive judicial comment than those in (WURA). In short, creditors in a liquidation should not be afforded less protection than creditors in a
68See generally Carfagnini,supra,n. 21.
69This provision was added in 1996. R.S.C. 1996, c. 6, s. 156.
70Central Guaranty Trust Co. v. Hees International Bancorp Inc.,supra,n. 64;Dominion
Trust Co. v. Royal Bank(1920), 1920 CarswellBC 2, 1 C.B.R. 397, [1921] 1 W.W.R. 90, 29 B.C.R. 169, 59 D.L.R. 224 (B.C. S.C.).
71A. Duggan & T. Telfer, “Voidable Preferences” in S. Ben-Ishai & A. Duggan, eds., “Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute c. 47 and Beyond(Toronto: LexisNexis, 2007) 147 at 160 [“Voidable Preferences”].
72Ronald C.C. Cuming, “Unfair Preferences: Reformulation of Section 95 of the Bankruptcy and Insolvency Act” (Paper presented to the Corporate Law Policy Directorate, University of Saskatchewan, December 1997) at 39 [Cumming 1997].
bankruptcy.”75This general recommendation to amendWURA“to con-form generally to the equivalent provisions ofBIA” was endorsed by the IIC in its 2000 report.
As noted above Statute c. 47and Statute c. 36propose to make substantial changes to the law of pre-bankruptcy transactions. These amendments toBIAare not without their own interpretative problems.76 However, it is our view that any reforms toWURAprovisions relating to pre-bankruptcy transactions should be harmonized with the 2005 and 2007 amendments toBIA.
(ii) The Powers of Inspectors
WURAgives judges discretionary power to appoint inspectors. An inspector’s role is to “advise and assist” a liquidator but an inspector’s powers are not further specified. WURA’s inspector provisions are in need of reform.77Re Commonwealth Trust Co.considered the scope of the discretion to appoint an inspector under section 41:78
Having in mind that it is the duty of inspectors to assist and advise, I think the court would appoint inspectors where it was shown that circumstances of the company and the nature of its business were such that inspectors could probably give useful advice and assistance to the liquidator, and that the court would not appoint inspectors and burden the winding-up with additional expense unless it was shown that inspectors could probably give useful advice and assistance.
Few other cases have interpretedWURAsection 41.
BIAadopts a different approach. Inspectors must be appointed in a bankruptcy proceeding.79IsWURA’s discretionary approach just another example of the statute’s antiquity?
AWURAinspector’s only role is to “advise and assist” the liqui-dator. The liquidator need not consult with inspectors on specific issues. WURAdoes not oblige the liquidator to have regard to inspectors’
di-75Baird & Caplan,supra,n. 39.
76“Voidable Preferences,”supra,n. 71; A. Duggan & T. Telfer, “Gifts and Transfers at Undervalue” in. S. Ben-Ishai & A. Duggan, eds., “Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute c. 47 and Beyond(Toronto: LexisNexis, 2007).
77For example, to address the interests of compensation funds who have intervened to provide some level of recovery for insurance company policyholders: see Alex Kennedy, “Com-pensation Plan for Property and Casualty Insurers” (1989) 1 Can. Insur. L. Rev. 203. 78Commonwealth Trust Co., Re, 1971 CarswellBC 102, [1971] 4 W.W.R. 278, 20 D.L.R.
(3d) 170 (B.C. S.C.) at para. 20. On costs seeWURA,supra,n. 1, s. 43: “The court shall determine the remuneration, if any is deemed just, of inspectors.”
rections.80In a winding-up proceeding “the liquidator. . . has sole re-sponsibility, acting under the statute and on direction of the Court, where necessary, to conduct the affairs of the company to achieve final liqui-dation.”81 A WURA inspector is not an independent investigator. A
WURA inspector should not attempt to “pry into the history of the company to see if anyone was to blame for its insolvency.”82
Cases suggest that aWURAinspector’s most important advisory role involves disposition of assets. In that role, an inspector may assist in seeing that the “very best sale is made and the very best price ob-tained.”83A judge in a winding-up proceeding can’t (or won’t) give a
WURAinspector extensive powers comparable to those of inspectors underBIA.84
BIAand WURA create strikingly different roles and powers for inspectors.85 Both statutes give inspectors an advisory role. However,
BIAgives inspectors greater powers and a supervisory role. ABIAtrustee may not exercise certain powers without the approval of inspectors.86
Impact Tool & Mould Inc. (Trustee of) v. Impact Tool & Mould (Wind-sor) Inc. (Receiver of)recently summarized the principal role of BIA inspectors:87
The inspectors’ role is integral to the operation of the bankruptcy regime. As the creditors’ representatives in the administration of the bankrupt estate, they owe a fiduciary duty to the general body of creditors, collectively. . . . [I]t is the inspec-tors who have the primary supervisory role in the administration of the bankrupt estate. They have an obligation to be proactive and to keep watch on the trustee to ensure that assets are realized to the best advantage of the estate.
Once again,WURA’s unreformed 19th century approach may ac-count for the differences.
80Re Commonwealth Trust Co.,ibid. 81Ibid.,at para. 16.
82Ibid.,at para. 18.
83Canada Woollen Mills Ltd., Re(1905), 1905 CarswellOnt 189, 5 O.W.R. 455, 9 O.L.R. 367 (Ont. C.A.), at 368 [O.L.R.].
84Carfagnini,supra,n. 21 at 90. 85Ibid.,at 90-91.
86Seee.g., BIA,supra,n. 6, s. 30.
(A) Who May Be Appointed as an Inspector under WURA?
ReCommonwealth Trust Co.noted thatWURAsection 63 author-izes a court, if it thinks expedient, to summon meetings of the creditors, contributories, shareholders (or members) of the company. The court concluded that inspectors might be appointed from members of one interested class only. For example, some shareholders might be ap-pointed; alternatively, independent inspectors could be appointed to represent different classes.88The court did not require that members of any particular representative group be appointed as inspectors.
Canada Deposit Insurance Corp. v. Canadian Commercial Bank went further.89It specifically noted that an inspector need not be inde-pendent. The court inCanadian Commercial Bankidentified two pos-sible routes to the selection of an appropriate inspector:
The first is the appointment of an independent inspector. The second is the appointment of an inspector from within those creditors who have an immediate interest and who will be carefully examining the winding-up proceedings in any event.90
The court identified the cost of an independent inspector as a major drawback. Appointing an inspector with an immediate interest who also represented other creditors might “attain the desired end of ensuring impartiality without reducing the assets available for creditors and share-holders.”91
The court in Canadian Commercial Bankappointed the Canada Deposit Insurance Corporation (CDIC) as an inspector.92The order al-lowed CDIC to apply only for those costs over and above those that CDIC would have incurred as a “de facto inspector.” This imposed a check on costs incurred in the winding-up proceeding.93
88Re Commonwealth Trust Co.(1971),supra,n. 78 at para. 17. The court concluded that
WURAinspectors were not given the same powers asBIAinspectors.
89(1986), 1986 CarswellAlta 425, 59 C.B.R. (N.S.) 10, 43 Alta. L.R. (2d) 24 (Alta. Q.B.). 90Ibid.,at para. 12.
91Ibid.
92The CDIC provides insurance against loss of deposit for benefit of depositors in member institutions. See Lazar Sarna, “Corporation and Bankruptcy: Definitions” (1994) 11 Nat’l Insolv. Rev. 33 at 39.
TheCanadian Commercial Bankcase raises an important question. CDIC and other entities exist to provide compensation to creditors when a financial institution fails. Should they be statutorily entitled to be inspectors in a winding-up proceeding?
The failure of an insurance company or other financial institution usually involves a large number of creditors. Each policyholder or de-posit holder will have a relatively small claim. Asking a vast number of creditors to vote on a representative inspector creates organizational difficulties in the coordination of creditors’ votes.94
Canada Deposit Insurance Corporation (CDIC), Property and Ca-sualty Insurance Compensation Corporation (PACICC), and CompCorp are all compensation or insurance funds designed to protect deposit holders or policyholders.95 WURA does not expressly recognize the important roles of such compensation funds. Such funds could rely on Canadian Commercial Bankwhen applying to be appointed as inspec-tors in cases they insure. However, they are not statutorily entitled to be appointed. The relevant compensation fund should be statutorily entitled to be appointed inspector in a winding-up proceeding.96
(iii) Preferred Creditors and Priorities
WURAcreates four categories of preferred claims on a winding-up of an insurance company:97By contrast,BIArecognizes at least 7 classes of preferred claims.98TheWURAcategories are:
– liquidation expenses99 – some wage earners’ claims
– policy holders’ claims
– some Superintendent of Insurance expenses100
94 IIC Report,supra,n. 25 at 22.
95 CompCorp was created by the life and health insurance industry. See B. Leonard, “Insur-ance Insolvency in Canada: The Failure of Confederation Life” (1994) I.I.C. Art. 1994-8 at 16.
96 See also IIC Report,supra,n. 25 at 22.
97 Section 172 provides that “nothing in Part III of WURA prejudices or affects the priority of any mortgage, lien or charge on the property of the company.”
98 IIC Report,supra,n. 25 at 13.
99 WURA, supra,n. 1, s. 161(1)(a). See Baird & L. Caplan,supra,n. 39 at 4 on the four categories.
Insur-We assume that the liquidation expenses priority and expenses incurred by the Superintendent and passed on to other companies pur-suant to theInsurance Companies Actsection 686(1)(a) aren’t contro-versial. As to the policyholders’ priority provision, the wording appears complicated as a consequence of the possibility of transfer or re-insur-ance.101However, it seems well understood by insurance specialists and probably works well.
That leaves only oneWURAcategory – wage earners’ claims.
(A) Unpaid Wage Earners: an Overview
WURA section 161(1)(b) gives priority to “claims of preferred creditors, specified in section 72.” Section 72 describes that category of preferred creditors as:
Clerks or other persons in, or having been in the employment of, a company, in or about its business or trade, shall be collocated in the dividend sheet by special privilege over other creditors, for any arrears of salary or wages due and unpaid to them at the time of the making of a winding-up order in respect of the company, not exceeding the arrears that have accrued to them during the three months immediately preceding the date of that order.
Wage earners are particularly vulnerable creditors. “Employees . . . lack the information to effectively assess the risk that their employers may go bankrupt. Further, they also lack the bargaining power to obtain protection in case of employer bankruptcy.”102Little has been said about the plight of unpaid workers in aWURAliquidation.
The IIC Report identified unpaid wage claims as a significant issue in the winding-up of financial institutions. The Report concluded, “it is
ance Co., 1997 CarswellOnt 62, 32 O.R. (3d) 102, 14 C.C.P.B. 1, 41 C.C.L.I. (2d) 1, 145 D.L.R. (4th) 747, 97 O.A.C. 18, 1997 C.E.B. & P.G.R. 8308 (headnote only) (Ont. C.A.) recognized that other creditors of the company would be paid in fifth priority. SeeWURA,
supra,n. 1, s. 95 (Distribution of Surplus) and s. 71 (what debts may be proved). On surplus:Canada (Attorney General) v. Confederation Trust Co.(2003), [2003] O.J. No. 2754, 2003 CarswellOnt 2523, 44 C.B.R. (4th) 198, 65 O.R. (3d) 519 (Ont. S.C.J.);Canada (Attorney General) v. Security Home Mortgage Corp., 2003 CarswellAlta 1171, 18 Alta. L.R. (4th) 250, 2003 ABQB 588, 231 D.L.R. (4th) 353, [2004] 3 W.W.R. 164 (Alta. Q.B.). 101SeeWURA,supra,n. 1, s. 161 (1).
particularly important to treat the employees of a troubled financial institution equitably because they typically play a critical role in deter-mining the success (or failure) of the liquidation or restructuring pro-cess.”103
The liquidation of Les Coope´rants supports this assertion. The liquidator “was very dependent on Les Coope´rants employees due to the considerable amount of time expected for the winding-up and the spe-cialized nature of the transactions.”104
We’ll now set out the existing positions of unpaid wage earners underWURAandBIA. Then we’ll review the majorBIAreform propos-als on the rights of unpaid wage earners in theWage Earner Protection Program Act.105The contrasts are stark.
(B) WURA: Wage Earners Entitled to Preferred Claims
WURAgives second priority to certain wage earners, after the costs of liquidation. Sections 161(1)(b) and 72, read together, give preferred creditor status to “Clerks or other persons . . . [employed] in . . . its business or trade . . . for . . . arrears of salary or wages . . . not exceeding the arrears . . . accrued . . . during the three months immediately preced-ing the [windpreced-ing-up] order.”
Parliament added the preferred claim for salary and wages to the Winding-Up Actin 1886.106The wording remains virtually unchanged. The few cases that comment on its scope focus on whether an individual falls within the meaning of “clerk or other person in or having been in the employment of the company.”107
103IIC Report,supra,n. 25 at 13-14.
104M. Doyle & D. St-Onge, “The Winding-Up of Les Coope´rants” (1993) I.I.C.Art. 1993-4 at para. 112.
105Statute c. 47,supra,n. 3;Statute c. 36,supra,n. 4.
106SeePeters’ Combination Lock Co., Re(1887), 26 N.B.R. 595, 1887 CarswellNB 33 (N.B. C.A.). See 1886, (49 Vict.), c. 46.
(C) BIA: Wage Earners Entitled to Preferred Claims
The unamendedBIAcreates a fourth ranking preferred claim for “wages, salaries or commissions or compensation.”108The section iden-tifies individuals eligible for the preferred status as “clerk, servant, traveling salesman, labourer or workman.” The purpose of the provision is “to protect that class of persons who depend upon the financial return from their personal services for their livelihood.”109
Courts have interpretedBIAsection 136(d) liberally.110Judges have developed various tests to determine whether a party is eligible for a preferred claim. Exclusivity of employment and the degree of control exercised over the claimant are relevant factors. A wage earner who worked intermittent intervals, as opposed to fixed hours, might not qualify.111
Whether a manager is eligible for preferred status is resolved by BIAsection 140. It specifically precludes officers and directors from asserting a preferred claim under section 136 “in respect of wages, salary, commission or compensation for work done or services rendered to the corporation inany capacity.”112There is no comparableWURA provi-sion.
(D) Reform Issues: What Wage Earners Should Have Preferred Claims
WURA’s preferred claim for “Clerks or other [employees]” has not been substantially revised since 1886. The terminology is out of date.113 Harmonization withBIAon this issue would be an improvement. How-ever, BIAlanguage is also out of date. Moreover, BIAterminology –
claim).Cf. Hartwick Fur Co., Re(1914), 1914 CarswellOnt 246, 26 O.W.R. 359, 6 O.W.N. 363, 17 D.L.R. 853 (Ont. H.C.);Ontario Forge & Bolt Co., Re(1896), 27 O.R. 230 (Ont. H.C.).
108BIA, supra,n. 6, s. 136(d). See generally, Marvin Catzman, “Employment Claims in Bankruptcy” (1976), 22 C.B.R. (N.S.) 97.
109Gordean Furniture Co., Re, 1923 CarswellAlta 80, 4 C.B.R. 237, [1923] 3 W.W.R. 630, [1923] 4 D.L.R. 1198 (Alta. T.D.).
110Specialty Bags Co., Re, 1923 CarswellOnt 6, 3 C.B.R. 617, [1923] 1 D.L.R. 827 (Ont. Bktcy.).
111See Houlden & Morawetz,supra,n. 42 at para. G75. 112BIA,supra,n. 6, s. 140.
“Clerk, servant, traveling salesman, labourer or workman” – isn’t suited to an insurance company or other financial institution.
TheWURAphrase “clerks or other persons, in or having been in the employment of, a company” does not conform to modern employ-ment terminology. However, 20th century courts primarily relied on the term “clerks” to preclude managers from asserting a privileged claim. The small disadvantage of new wording – eliminating a fewWURA precedent cases – would be outweighed by making BIAcases useful precedents.
(E) Reform Issues: What Should be the Extent of Wage Earners’ Preferred Claims
TheWURApreferred claim for salary and wages is not limited to a fixed dollar amount. The claim relates to an amount “not exceeding the arrears that have accrued . . . during the three months immediately preceding the date of the [winding-up] order.” The equivalentBIA pre-ferred claim is with respect to services rendered during the six months immediately preceding the bankruptcy to the extent of two thousand dollars in each case.114
There is one advantage to not having a fixed dollar amount:WURA doesn’t need periodic revision to account for changing wage and salary rates. However, courts have ruled on whether the preferredWURAclaim includes holiday pay or an annual bonus. The results have been incon-sistent. Holiday pay has been rejected as a preferred claim while in another case a court accepted an annual bonus as a preferred claim.115 Some legislative clarification would be helpful.116
Coope´rants socie´te´ mutuelle d’assurance-vie/Coope´rants Mutual Life Insurance Society, Re117said that section 72 should be given a wide
114BIA,supra,n. 6, s. 136(d).
115Canada (Attorney General) v. Western Capital Trust Co., 1985 CarswellBC 261, 66 B.C.L.R. 138, 58 C.B.R. (N.S.) 135, [1985] 6 W.W.R. 183 (B.C. S.C.) (severance and holiday pay did not come within the meaning of “salary and wages”);Abeles v. Turgeon
(1914), 23 Que. K.B. 533, (sub nom.Allner v. Lighter) 13 D.L.R. 210 (Que. K.B.) (annual bonus was a preferred claim).
116TheWage Earner Protection Program Act[Not in force] (“WEPPA”) (Statute c. 47,supra, n. 3, s. 2) is a useful precedent. It says, “In this Act . . . ‘wages’ includes salaries, com-missions, compensation for services rendered, vacation pay and any other amounts pre-scribed by regulation but does not include severance or termination pay”.
interpretation because it related to economic protection. At issue before the court was whether the maximum amount allowable underWURA section 72 encompassed the arrears accrued during the last three months preceding the winding-up order or an amount equal to the salary of the last three months prior to the order.
The Quebec Court of Appeal concluded that employees were en-titled to the latter amount. No case has since considered the decision. It isn’t obvious that other courts will follow suit, given that the wording of the statute refers to an amount “not exceeding the arrears that have accrued to them during the three months immediately preceding the date of” the winding-up order.
We haven’t come up with any reason why the claim should be different from the equivalentBIAclaim.118
(F) Statute c. 47 and Statute c. 36 and the Wage Earner Protection Program Act
Reform of wage earner priority must include a consideration of Statute c. 47andStatute c. 36which create theWage Earner Protection Program Act(WEPPA). The Act protects wage earners in the context of the bankruptcy of the employer, where the employer is in receivership. The legislation will also protect wage earners in the context of a proposal proceeding underBIAor a reorganization underCCAA.119The discussion below focuses only on the bankruptcy of an employer.
WEPPAis designed to compensate a wage earner out of the Con-solidated Revenue Fund. It applies to non-management employees not related to the employer whose employment was terminated.120The max-imum amount of compensation would be the greater of $3000 or four times the employee’s maximum insurable earnings under the Employ-ment Insurance Act during the six months prior to bankruptcy. The Crown would be able to recover some of these funds against the
em-(sub nom.Alias v. Coope´rants (Les), Socie´te´ mutuelle L’assurance-vie (Liquidateur)) 225 N.R. 395 (note) (S.C.C.). We’ve relied on the English translation headnote.
118The IIC Report recommended that the claim underWURAbe limited to the amount due in one regular pay period plus accrued vacation pay. IIC Report,supra,n. 25 at 13-14. 119Priorities,supra,n. 29 at 124-127.
120See E. Patrick Shea,Bankruptcy and Insolvency Act, Companies’ Creditors Arrangement
Act, Bill C-55 & Commentary(Toronto: LexisNexis Canada Inc., 2006) at 50. Directors and officers are not entitled to make claims.Statute c. 36,supra,n. 4, adding s. 81.1(6) to
ployer through the enforcement of a security interest granted to employ-ees under the proposed legislation.121
WEPPAwould radically alterBIApriority scheme. Unpaid wage earners currently have a fourth ranking preferred claim. They would be promoted to a limited secured status. TheirBIAclaims for unpaid wages would be secured up to a maximum of $2000 owing for services rendered during the six months before bankruptcy.122The secured claim would be over all the employer’s current assets such as “cash, cash equivalents – including negotiable instruments and demand deposits – inventory or accounts receivable, or the proceeds from any dealing with those as-sets.”123
The newBIAsecured claim for unpaid wages would have priority over all other claims with respect to the debtor’s current assets, except for the claims of unpaid suppliers (who have the right to repossess goods), rights of unpaid fishers, farmers and aquaculturists, and deemed trust claims that will survive a bankruptcy.124To the extent that wage earners are unsuccessful in satisfying their secured claims, unpaid wage claims would be a fourth ranking preferred claim.125
Should a revised WURA adopt similar reforms? We have been waiting proclamation of WEPPA for some time and the government finally set July 7, 2008 as the date for provisions to come into force.126 However, some preliminary comments can be made.WURAandBIA wage earner claims are already different. The creation ofWEPPAand enhanced priority for wage earner claims would moveBIAandWURA even further apart on this issue. This could increase statute shopping if WURAwere not restricted to insurance corporations and other financial institutions. Even ifWURA were restricted to financial institutions, it
121Statute c. 36,supra,n. 4, amendingWEPPAs. 36 which provides that if payment is made to an employee, the Crown is subrogated to any rights the employee may have against the employer or directors of the company. See Priorities,supra,n. 29 at 125.
122Statute c. 36,supra,n. 4 addingBIAs. 81.3. 123Ibid., s. 1(2) definition of “current assets”. 124Ibid., adding s. 81.3(4) toBIA(not yet proclaimed).
125Statute c. 47,supra,n. 3, amendingBIA,s. 136(1)(d) (not yet proclaimed). To the extent that a secured creditor claim is eroded by new employee priority, the legislation provides for a new fifth ranking preferred claim for secured creditors where a secured claim was compromised: s. 136(d)(0.1) (not yet proclaimed).
would be hard to justify enhanced wage earner rights underBIAwithout making similar changes toWURA.127
(G) Other Claims that Should be Preferred in WURA
WURAgives priority to the costs of administration and claims of unpaid wage earners.128In stark contrast to the limited classes of pre-ferred claims in WURA, BIA recognizes at least seven categories of preferred claims. Claimants not listed inWURA are municipalities,129 landlords, execution creditors and injured workers.Canada (Attorney General) v. Western Capital Trust Co.130acknowledged that BIAand
WURA“are not by any means in the same terms.” The court noted that WURA“says not a word either by way of scheme of distribution or by any other provision about priorities or privileges except to the limited extent of s. 72.”131There is no reason why WURA’s preferred claims shouldn’t be similar to those inBIA.132
(iv) Crown Priority
WURAdoes not mention the Crown. It doesn’t override the com-mon law prerogative right to priority of payment.133
(A) Origins of the Crown Prerogative
Crown priority is a “vestige of the prerogative powers of the Crown, which arise at common law”.134The royal prerogative powers date from feudal times in England. Some prerogative powers were abolished by the Bill of Rights.135 The right of the Crown to have its debts paid in
127This is not a new observation. See R. Cuming,supra,n. 102 at 72-77. His principal recommendation included the creation of a special priority for wage claims where the company was in liquidation proceedings underWURA.
128We regard liquidators’ expenses and Superintendent’s expenses as uncontroversial. 129Beaver Drugs, Re(1926), 7 C.B.R. 719, 1926 CarswellOnt 45 (Ont. S.C.);Faulkner Ltd.,
Re(1915), 34 O.L.R. 536, 25 D.L.R. 780, 9 O.W.N. 118 (Ont. H.C.), affirmed (1917), 40 O.L.R. 75, 38 D.L.R. 84, 12 O.W.N. 50 (Ont. C.A.).
130Supra,n. 115 at para. 19. 131Ibid., at para. 24.
132IIC Report,supra,n. 25 at 13. 133Davis,supra,n. 62 at 26.
134Christian Brothers of Ireland in Canada, Re(2004), 2004 CarswellOnt 574, 69 O.R. (3d) 507, 49 C.B.R. (4th) 12 (Ont. S.C.J. [Commercial List]) at para. 86. See Law Reform Commission of British Columbia,The Crown as a Creditor: Priorities and Privileges
priority to other creditors survived.136Thus the Crown could assert an absolute priority for revenue related debts upon the insolvency of an English subject.137 The Crown in Canada asserted similar prerogative rights after Confederation.138
(B) Crown Prerogative and WURA
In 1885, the Supreme Court of Canada inR. v. Bank of Nova Scotia recognized the Crown prerogative right of priority of payment in the context of a winding-up proceeding:139
I do not think there can be a doubt that the Crown is entitled at common law to a preference in a case such as this, for when the rights of the Crown come in conflict with the right of a subject in respect to the payment of debts of equal degree, the right of the Crown must prevail.140
The common law prerogative is “liable to be restricted or dimin-ished by legislation.”141However, no common law prerogative will be abrogated by a statute unless “the statutory purpose and object to that effect is clear.”142“Nothing in theWinding-Up and Restructuring Act abolishes Crown priority”;143“there is no pretence for saying that the Crown should be bound thereby” because the Crown isn’t mentioned in WURA.144
illegally, by an uncalled Parliament immediately after the James II fled England and thereby ended the “Glorious Revolution.” Other prerogatives (but not priority in debt collection) were curtailed byMagna Carta(formally 1215, but realistically by the laterMagna Carta, 1297(U.K.), 25 Edw. I) when Edward I confirmed the original Charter that had been repealed by Papal Bull after John’s submission to the Holy See, by thePetition of Right, 1628(U.K.), 3 Chas. I, c. 1, and by theAct of Settlement, 1700(U.K.), 12 & 13 Will. & Mary III, c. 2.
136The Crown as Creditor,supra,n. 134 at 1, n.1;Agricultural Credit Corp. of Saskatchewan
v. Kozak, 91 Sask. R. 277, [1991] 4 W.W.R. 231, 1991 CarswellSask 176 (Sask. Q.B.). 137B. Morgan, “Should the Sovereign be Paid First? A Comparative International Analysis
of the Priority for Tax Claims in Bankruptcy” (2000) 74 Am. Bank. L.J. 461 at 463. 138Tasse´ Report,supra,n. 2 at 122.
139(1885), 1885 CarswellPEI 1, 11 S.C.R. 1, 4 Cart. B.N.A. 391 (S.C.C.);Re Dominion
Shipbuilding & Repair Co., 59 O.L.R. 89, [1926] 3 D.L.R. 274 (S.C.) at para. 15 (Crown entitled to assert prerogative rights under theWinding-Up Act“to be paid in priority to all ordinary creditors” whereas no prerogative right exists under theBankruptcy Act.);Simpson & Hunter Ltd., Re, (1916), 1916 CarswellAlta 273, [1917] 1 W.W.R. 402 (Alta. T.D.);
Elmsdale Co., Re(1904), 24 C.L.T. 341 (N.S. T.D.). 140R. v. Bank of Nova Scotia(1885),ibid.,at 10. 141The Crown as Creditor,supra,n. 134 at 8.
