Question Period Note: CHANGES TO INSOLVENCY LAWS

What is the Government of Canada doing to ensure Canada’s insolvency laws promote economic stability and growth while also balancing the needs of pensioners and other creditors?

• The Federal Government recognizes that a number of corporate insolvencies have created challenges for pensioners, as well as for small businesses, lenders, and other creditors;
• New changes to Canada’s insolvency laws will make insolvency proceedings fairer, more transparent and more accessible for pensioners and workers – promoting economic stability and growth; and
• They will also provide better oversight of corporate behaviour and help ensure the alignment of corporate incentives and pensioner interests.

SUPPLEMENTARY MESSAGES
If pressed on “Super-Priority” for pension deficits in insolvency proceedings:
• The Government acknowledges the hardship and uncertainty faced when an employer is insolvent and measures have been introduced to address the root causes of these challenges;
• The Government is committed to evaluating the effectiveness of its new measures and remains open to assessing what else could be done in the future to enhance retirement security;
• During its consultations, the Government heard the desire by some for a fundamental change in how creditors are paid in insolvencies, but serious concerns with such a change were also expressed; and.
• Such a change would also be inconsistent with international practice, which in turn, could impact investments and national competitiveness.

If pressed on rising consumer insolvencies:
• Canada’s consumer insolvency laws play an important socio-economic role by permitting honest but unfortunate debtors who encounter severe financial difficulties to release their debts and obtain a fresh start. As such, federal insolvency legislation strives to find the proper balance between the competing interests of debtors and creditors; and
• We will continue to monitor household debt levels, as well as consumer insolvency laws, to ensure they remain up-to-date and responsive to the needs of Canadians and our economy.

If pressed on the Sears Canada insolvency:
• The Government, through Service Canada, is making every effort to provide affected employees with information and help to connect them to the relevant programs and services; and
• We cannot comment specifically on matters related to the Sears Canada proceedings as these matters are still before the courts. The Government will continue to monitor the Sears Canada situation.

The Canadian insolvency regime is composed of two main laws: the Bankruptcy and Insolvency Act (BIA), which governs liquidations, proposals for individuals and the reorganizations of small businesses, and the Companies’ Creditors Arrangement Act (CCAA), which deals with the restructuring of the debts and obligations of large corporations. Their principal role is to create a framework for collective action to settle creditors’ claims against the debtor to prevent a “rush to the courthouse”, maximize value, and ensure an orderly distribution of the proceeds.

Insolvency proceedings can take the form of liquidation, where the debtor’s assets are sold to pay creditors, or restructuring, where the debtor and creditors agree to a plan to financially rehabilitate the debtor. Both proceedings are designed to provide a fresh start to honest but unfortunate debtors; strike a balance between the interests of competing creditors; provide certainty, by ensuring transparency, efficiency and impartiality; and encourage restructuring over liquidation, as evidence has shown that restructuring provides better recovery for creditors and preserves jobs.

The BIA sets out an order of payment in the case of liquidations. Deemed trusts and super-priorities (e.g., CPP, EI, and income tax withholdings, and outstanding pension contributions) are paid first, followed by secured claims (mortgages and asset-based loans), preferred claims (trustee’s fees) and then unsecured claims, such as suppliers, contractors, bondholders and unfunded pension liabilities. A predictable bankruptcy distribution scheme enhances commercial certainty and facilitates credit decisions by both borrowers and lenders in the event of default. Research indicates that changing insolvency priorities would likely result in lenders increasing the cost (and reducing the availability) of credit, particularly for financially distressed firms, resulting in more liquidations and fewer restructurings.

The CCAA allows large companies to negotiate new terms for the repayment of debts under court supervision, and to emerge from the process as a viable and more competitive business. Where a viable restructuring plan is not possible, the CCAA process provides for an orderly resolution of the company’s obligations. While under CCAA protection, companies can continue to operate, preserve jobs and serve customers while negotiating a restructuring plan with creditors and stakeholders under court supervision, including employees, pensioners and suppliers.

Insolvency and Pensions
In response to concerns about the impact of employer insolvency on workplace pension plans, the Government held national consultations with workers, pensioners, companies, and experts in November and December of 2018, and received more than 4,400 submissions from the public.

To ensure that Canadians have greater peace of mind when it comes to their retirement, the Budget Implementation Act No. 1, 2019 made changes to marketplace and pension framework laws:
• Changes to the Bankruptcy and Insolvency Act and Companies’ Creditors Arrangement Act in force as of November 1, 2019, to make insolvency proceedings fairer, more transparent and more accessible for pensioners and workers:
o Participants in these proceedings will be explicitly required to act in good faith;
o Courts will be given further powers to order disclosure of the real economic interests of creditors in a debtor company, where appropriate;
o Directors will have potential liability for excessive and unreasonable payments made to executives in the lead up to insolvency; and
o Relief ordered at the outset of a CCAA proceeding will be limited to measures necessary to avoid immediate liquidation of the company, which will reduce the chances of immediate suspension of pension contributions and retiree benefits by the company.

• Changes to federal corporate laws to set better oversight of corporate behaviour, and help better align corporate decision making with pensioner interests:
o Federally-incorporated businesses are now explicitly permitted to consider pensioner and worker interests when acting in the best interests of the corporation;
o Publicly-traded, federally-incorporated firms will be required to disclose their policies pertaining to workers and pensioners and executive compensation, or explain why such policies are not in place; and
o These same firms will also be required to hold and disclose the results of non-binding shareholder votes on executive compensation policies.

• Changes to the Pension Benefit Standards Act (under the responsibility of the Minister of Finance) to help protect federally regulated pension benefits and ensure sustainability of pensions by:
o Clarifying that if a pension plan is wound-up, it must still provide the same pension benefits as when it was ongoing; and
o Allowing pension plans to fully transfer the responsibility to provide pensions to a regulated life insurance company through the purchase of annuities to improve plan sustainability and better protect retirees' pensions from risk of employer insolvency.

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