The road towards bankruptcy is sometimes inevitable, but it can also be unpredictable (think how many were unexpectedly hit by financial burdens in the wake of 9-11).

Although we traditionally think of the impact that bankruptcy has on the insolvent person or company, the implications for creditors must not be forgotten. Although your business or personal financial situation may seem healthy and secure, bear in mind that someone with whom you do business, or with whom you are employed, may not be sailing quite as smoothly, thus putting you at risk.

The Bankruptcy and Insolvency Act (the "Act") has been in the process of change throughout the past five years, and although the amendments have received Parliament's approval, they have yet to come into force. It is still speculative as to when this will occur; however, it is likely to be before the end of 2008. Therefore, now might be a good time to familiarize yourself with the amendments to avoid being caught on your heels when they set in.

The amendments to the Act are numerous, and not necessarily all noteworthy. The following will offer a brief summary of the changes that are most likely to affect (or perhaps even interest) the reader. Here is a brief overview of some key concepts:

Bankruptcy Basics

When a person or business is no longer able to meet its debt obligations it may be declared insolvent. Trustees, who are licensed by the Office of the Superintendent of Bankruptcy (part of the federal government), provide information and advice to debtors about the bankruptcy processes and assist in protecting the rights of debtors and creditors. In the event that a person or business becomes insolvent and goes into bankruptcy, its assets are liquidated and the proceeds are divided among those who are owed money by the bankrupt (the creditors). Proceeds are not divided equally between all – important priorities are spelled out in the Act dictating how the various creditors rank. When a company becomes insolvent, receivership is a viable alternative to bankruptcy. In the case of receivership, a secured creditor hires a receiver to take control of the assets of the company in an effort to bring its financial situation under control.

Priorities

Traditionally, secured creditors (those who have secured debts from the debtor – such as mortgagees) rank in priority to other creditors. The new amendments to the Act create new "super-priorities" for certain claims for property of the bankrupt.

Wages

Employees who have unpaid wages and vacation pay will have a new super-priority over other creditors when the amendments come into force. This is based on the fact that employees are involuntary creditors and are vulnerable to their employers. The amendment will give priority to claims for services that an employee has rendered during the 6 month period leading up to the date of the initial bankruptcy event and ending when the bankruptcy is secured. Claims will be allowed for up to $2,000 in unpaid wages. Additional protection for employees is found under the Wage Earner Protection Program Act.

Pensions

While pensions have always been offered protection from seizure in a bankruptcy, the amendments to the Act will create a super-priority over all other assets for certain unremitted pension contributions. Pension contribution amounts that have been deducted from employee pay but have not yet been remitted to the pension fund as of the date of bankruptcy are secured. In the case of a defined contribution plan, all amounts that are required to be contributed, but have not yet been contributed, are secured. In a defined benefit plan, all normal unremitted contributions are protected.

RRSPs

While the current Bankruptcy and Insolvency Act protects pensions in registered pension plans, the Act has been criticized as being unfair towards those who do not have pensions, as the Act fails to protect assets held in Registered Retirement Savings Plans (RRSPs). Section 67(1) of the Act, however, which determines what gets treated as "property of the bankrupt," will be amended to exclude property in an RRSP, RRIF or any other prescribed plan from the property that is divisible among creditors, with the exception of any such contributions made in the 12 months leading up to the date of bankruptcy.

Professional Fees

The court may declare that priority is to be given to fees and expenses incurred by trustees or financial, legal or other experts that have been hired in respect of any matters dealing with a bankrupt's property. All secured creditors who are likely to be affected by this priority must be provided with notice, otherwise the professional fee will not be given priority.

Unpaid Suppliers

Unpaid suppliers have always had a super-priority in their claims against debtors; however, the new provision will amend the time during which the unpaid supplier is entitled to submit a written demand for an outstanding payment. The supplier must submit its demand within 15 days of the date of bankruptcy, and the demand is limited to goods that were delivered within the 30 day period before bankruptcy.

Student Loans

Although student loans do not fall into the category of "priorities," a noteworthy amendment has been made to the Act relating to student loans. When a debtor is discharged from bankruptcy, the discharge order does not relieve the bankrupt from its obligation to pay student loan debts. The bankrupt may, however, apply to the court to have the debt relieved if its financial difficulties are ongoing. If the court is satisfied that a person will be unable to pay the liabilities under a student loan, the debt may be relieved. Currently, the Act requires that the applicant wait 10 years before making this "hardship" application, but the amendments will reduce the waiting time to five years.

As mentioned at the outset, the above is but a taste of the multitude of changes that are slated to occur to the Bankruptcy and Insolvency Act in the near future. If you were not already aware of the amendments before reading this (and you've stuck with me until now), you may have realized that bankruptcy is either more interesting, or more relevant to you, than you previously thought. The website for the Office of the Superintendent of Bankruptcy is a good resource for more information (www.osb-bsf.ic.gc.ca). For the brave, the Department of Justice has published the amendments on its "Laws" website (http://laws.justice.gc.ca/).

Stephanie Hamilton

BrazeauSeller LLP

www.brazeauseller.com

Stephanie Hamilton is an associate with BrazeauSeller.LLP. Stephanie can be reached at 613-237-4000 ext. 272, or at shamilton@brazeauseller.com. For more information about Stephanie, please visit www.brazeauseller.com.