i Statutory framework and substantive law

There are three federal statutes that govern insolvency law in Canada: the Bankruptcy and Insolvency Act (BIA),2 the Companies' Creditors Arrangement Act (CCAA)3 and the Winding-Up and Restructuring Act (WURA).4 The BIA, together with its regulations, is a self-contained code that deals with the liquidation of assets and the restructuring of debts of individuals, partnerships, corporations (other than certain excluded types of corporations) and other business entities that meet residency and minimal debt requirements. The BIA also provides for receiverships where an insolvent entity's assets and rights are placed in the custody and care of a third party called a receiver. The receiver may continue operations, but more typically, the assets are liquidated. The CCAA, together with its regulations, deals only with the restructuring of the debts of corporations (other than certain excluded types of corporations) and income trusts, that meet certain residency requirements and meet higher minimum debt requirements than those found under the BIA. The WURA deals with the liquidation and restructurings of certain specified entities, such as banks and trust companies; in effect, all of those entities and corporations specifically excluded from the BIA and CCAA.

Of the three insolvency statutes, the BIA represents the most complete code, providing substantive provisions dealing with, inter alia, the scope and breadth of stays of proceedings, distributional priorities, fraudulent transfers, the sale of assets, the treatment of contracts, interim financings, cross-border proceedings, and penalties and sanctions against debtors and their directors for violations under the BIA. The BIA also contains provisions dealing with the appointment of receivers and the rules regarding their conduct. Restructurings under the BIA are by way of 'proposals' to creditors. Such proposals bind all affected creditors, if approved by the requisite double majority (two-thirds of proved claims and over 50 per cent of creditors per class) and subsequently by the court.

The CCAA is a more flexible statute than the BIA, allowing courts more discretion in assisting restructuring corporations. For example, under the BIA, a stay of proceedings is limited to a maximum of six months in a proposal, and the scope of that stay is set out and limited by statute. There is no limit to the maximum cumulative length of a stay of proceedings under the CCAA, and the court has significant discretion on the scope of the stay of proceedings beyond what is available under the BIA. Like the BIA, the CCAA also has substantive provisions dealing with distributional priorities, fraudulent transfers, the sale of assets, the treatment of contracts, interim financings and cross-border proceedings. Restructurings under the CCAA are done through a 'plan of compromise or arrangement'. Such plans, if approved by the requisite double majority (the same as under the BIA), and subsequently by the court, bind all affected creditors.

The WURA is less structured than the BIA or the CCAA and applies primarily to financial institutions. In Canada, the banking system is very stable, and, therefore, there are few proceedings under the WURA.

Both the BIA and the CCAA contain provisions that mandate their review every five years. The BIA and CCAA were last amended in 2009, and the government of Canada launched a public consultation in May 2014 with the release of a discussion paper seeking input on key aspects of Canada's insolvency regime and its administration. Following a consultation process, a report was tabled before Parliament in 2015, but no further insolvency reforms are on the horizon. Any future reform will occur following a review by a parliamentary committee and it is unclear when any further amendments to the BIA or CCAA will be considered.

ii Policy

With respect to restructurings, whether it is the debts of an individual or business entity, the objective is to provide a debtor in financial difficulty the time and opportunity to restructure and develop a fresh arrangement with creditors with a view to avoiding a bankruptcy liquidation. The goal is to keep debtors in financial difficulty operating and protected from creditors, in order to allow the debtor to stabilise operations and develop a restructuring plan that may then be put to its creditors for consideration. If the requisite majorities approve the plan, it binds all affected creditors and the debtor emerges from bankruptcy protection and continues its (restructured) operations.

iii Insolvency procedures

To reorganise under the BIA, an insolvent debtor must have liabilities of at least C$1,000, carry on business in Canada and be insolvent. A BIA reorganisation is commenced by a debtor either lodging a proposal to creditors with a proposal trustee or filing what is known as a notice of intention (NOI) to make a proposal under the BIA. If a NOI is filed, the debtor has 30 days to file a proposal, which may be extended by a court order for up to five additional months, in periods of no more than 45 days at a time. If the debtor fails to file a proposal by the end of the final period, or if the proposal is rejected, then the debtor is deemed to have made an assignment into bankruptcy. A stay of proceedings is automatically imposed by statute upon a proposal or NOI being filed.

A bankruptcy liquidation commences with either an assignment into bankruptcy by the insolvent debtor or an application for a bankruptcy order by one or more creditors owed at least C$1,000, where the debtor is insolvent and has committed an act of bankruptcy. Once a bankruptcy order or assignment is made, a trustee is appointed over the assets and is charged with collecting and liquidating the assets of the bankrupt with a view to distributing proceeds to creditors. A meeting of creditors takes place shortly after the bankruptcy, and inspectors may be elected by the creditors to oversee and provide instruction to the trustee on how the proceeding is conducted. Once the assets are liquidated, the trustee distributes the proceeds to creditors who have filed proofs of claim based on the priorities scheme set out in the BIA.

To reorganise under the CCAA, a company must carry on business in Canada, have total liabilities exceeding C$5 million and be insolvent. CCAA proceedings are commenced with a court application by the reorganising debtor for what is known as an 'initial order', which establishes the proceeding and sets out the general parameters, including stays of proceedings, provisions that prohibit creditors from enforcing claims against the debtor, provisions that prohibit contracting parties from terminating contracts with the debtor, interim operational matters for the debtor, the appointment of a monitor, and interim financing. Under the CCAA, there is an initial discretionary stay of proceedings of up to a maximum of 30 days. Thereafter, the stay of proceeding may be extended at the discretion of the court for any additional period of time. In the past, reorganisations have taken the form of the development of a plan of compromise or arrangement, consisting of a proposal to creditors to compromise claims. The time frame in which a debtor has to file a plan is in the discretion of the court. Creditors are grouped into classes based on commonality of interest for purposes of voting and distribution under the plan. A majority in number, representing two-thirds in value of the claim of each creditor class, must approve the plan, as well as the court. If they do, then the plan will be binding on all creditors in the class. The CCAA is silent on the time frame to seek court approval.

Under the WURA, depending on the circumstances, a debtor, a creditor, a shareholder or the Attorney General of Canada may commence a proceeding. A stay of proceedings may be sought from the court by the debtor, creditor, contributory, liquidator or the original applicant. The remedy is discretionary. Upon the making of a winding-up order, an automatic stay is imposed. The WURA provides no restrictions on the amount of time a debtor has to restructure or any restriction on the discretion of the court to grant or restrict such time. There is also no time frame for seeking court approval.

In proceedings under the BIA, CCAA and WURA, any affected party may oppose or seek to lift the stay of proceedings. To do so, creditors must prove that they are likely to be materially prejudiced by the continuance of the stay, or it is equitable on other grounds that the stay be lifted. Unless there are compelling reasons to lift the stay, courts are normally reluctant to do so, especially at the outset of the proceeding, so that the debtor has time to attempt to restructure.

Receiverships can be commenced either under the BIA or under provincial legislation. As an equitable remedy, receiverships take on many forms but typically a receiver is appointed either privately pursuant to a security agreement or by way of court order, and is given certain powers to either operate a business or seize and liquidate assets or sell a business as a going concern, with a view to distributing the proceeds of sale to the creditors of the debtor. Receiverships are a very common remedy for dealing with insolvency in Canada and a useful tool for monetising the business or assets of an insolvent debtor.

iv Control of insolvency proceedings

The overall control of any court proceeding is in the hands of the court as directed and allowed by the relevant insolvency statute. Restructuring proceedings in Canada, save rare exceptions, are commenced and led by the debtor – similar to the debtor-in-possession (DIP) style of restructuring used in the US. The debtor (via management) remains in control of its assets and operations. In all cases, an insolvency professional (almost always a qualified bankruptcy trustee) will be appointed to act as proposal trustee in a BIA proceeding, as monitor in a CCAA proceeding, and in several possible capacities under the WURA. In each case, this professional acts as the eyes and ears of the court and seeks to ensure that the debtor is complying with the statute and court orders (and provides reports to the court and creditors).

v Special regimes

As previously noted, individuals and most business entities may file under the BIA and income trusts and most corporations may file under the CCAA. Banks, trust companies, insurance companies, loan companies, building societies, and certain trading companies may only commence proceedings under the WURA.

vi Cross-border issues

Plenary proceedings in Canada may only be commenced by debtors resident in, carrying on business in, or having assets in Canada. A debtor that has no presence in Canada may not commence a plenary proceeding. Where a debtor carries on business in more than one location, the courts will look at factors such as the location of main operations, the location of management, the location of the majority of creditors and convenience for the majority of stakeholders. Canadian courts have generally expressed a willingness to assist foreign courts where such assistance would not contravene public policy concerns in Canada. With the adoption of most of the UNCITRAL Model Law on Cross-Border Insolvencies in 2009, Canadian courts are now mandated to cooperate with foreign courts, subject to public policy concerns, once an ancillary proceeding is commenced. Pursuant to these regimes, proceedings ancillary to both foreign main and foreign non-main proceedings may be commenced in Canada. Neither the BIA nor the CCAA contain time frames or time restrictions for any such filings. Ancillary proceedings may be commenced by a foreign representative, which is a party appointed in the foreign proceeding. An automatic stay is granted if the proceeding is recognised as a foreign main proceeding, and a discretionary stay may be granted if the proceeding is recognised as a foreign non-main proceeding.


Despite having a growing and relatively stable economy, Canada faces challenges including one of the highest consumer debt-to-income ratios in the G20, changing demographic trends, and the potential impact of lower commodities prices. While the period of 2002–2007 saw a relatively stable consumer insolvency rate, the 2008 downturn pushed it higher in 2009. Since that time, the rate has trended back to pre-recession levels.5

The total number of insolvencies for the 12-month period ending 30 April 2018 decreased by 1.2 per cent compared with the 12-month period ending 30 April 2017.6 For the 12-month period ending 30 April 2018, individual insolvency filings accounted for 97.1 per cent of total insolvency filings.7

In contrast to individual insolvency trends, the business insolvency rate8 has fallen nearly 70 per cent since 2002.9 Unlike other periods of economic downturn, the 2008 recession did not result in an increase in business insolvencies.10 Business insolvencies for the 12-month period ending 30 April 2018 decreased by 2.5 per cent compared with the 12-month period ending 30 April 2017.11 The two sectors that experienced the largest decrease in the number of insolvencies were educational services and mining and oil and gas extraction.12 The construction sector experienced the largest increase in insolvencies.13


i Urbancorp Toronto Management Inc. (Re)

In Urbancorp Toronto Management Inc (Re)14 the Urbancorp group of companies (Urbancorp) commenced proceedings under the CCAA. One of the creditors, Speedy Electrical Contractors Ltd (Speedy), had loaned monies to the principal of Urbancorp and was also owed monies for work performed. Prior to the insolvency, Speedy had threatened to commence legal action if amounts owing to it were not repaid. As a result, the parties entered into an agreement which provided an extension of the time to repay and in exchange granted security over a property owned by one of Urbancorp's special purpose entities to Speedy. Shortly after, Urbancorp collapsed and commenced insolvency proceedings.

When Speedy sought to rely on its security in the insolvency proceedings, the court-appointed monitor opposed on the basis that the security was a preferential or undervalue transaction and thus unenforceable. The key issue in the case was whether there was any intention on the part of Urbancorp to defraud, defeat or delay a creditor. The monitor sought to rely on the long-standing relationship between the owner of Urbancorp and Speedy, which resulted in Speedy loaning money personally to Urbancorp's owner, as a factor that gave Speedy leverage to bypass normal economic incentives making the relationship non-arm's length. The court was not convinced that the transaction was intended to be preferential because the conduct of the parties was consistent with a bona fide commercial transaction, finding the written communications between the parties showed they were adverse in interest and operating under normal economic incentives.

ii Arrangement relatif à Bloom Lake

Bloom Lake General Partner Limited, Wabush Resources Inc and related entities (Bloom Lake) received court protection under the CCAA in 2015, and subsequently virtually all of its assets were liquidated.15 The remaining assets included preference claims valued at approximately C$173 million, and there was proposed settlement of those claims in 2018 that would result in between C$62 and C$100 million available for distribution to the third-party unsecured creditors. Based on this proposed settlement, Bloom Lake sought an order allowing a meeting of creditors to be called to vote on a proposed plan of compromise and arrangement (the Plan) that would distribute the proceeds of the liquidation to creditors. However, it was also anticipated that further negotiations on the form of the Plan would occur right up until the vote.

Employees and retirees held a significant claim of approximately C$103.8 million for post-employment benefits and one of the issues on the motion was how the 2,400 individuals would vote their claims. The non-unionised employees and retirees were represented by several appointed employees (the Representative Employees), and the unionised employees and retirees were represented by their union. Bloom Lake proposed that each individual would vote his or her own claim, but the Representative Employees and the Union sought a discretionary deemed proxy that would apply unless the employee or retiree opted out of it by advising the court-appointed monitor that he or she will attend the meeting in person or appointed a different person to act as proxy. In addition, the union also asserted that it was the only party entitled to vote the claims because it had the right of exclusive representation of its union members. In their opposition to the proxy, Bloom Lake, the monitor and the largest unsecured creditor argued that a deemed proxy would give the Representative Employees and union too much leverage in the voting to take place.

The court had no concerns in authorising a vote on the Plan. On the issue of the discretionary deemed proxy requested by the Representative Employees, the court engaged in a three-part analysis to determine the appropriateness of a discretionary deemed proxy.

First, the court examined whether it was appropriate to give a discretionary deemed proxy at all. On this issue, the court was not satisfied that the union was entitled to vote its members' claims based on the principle that a union has exclusive representation of its union members. This principle relates to claims under the collective agreement, and the court found that it does not give a union the right to vote for the employees and retirees in all circumstances. Examples cited by the court included that employees retain the right to vote individually on such important issues as the acceptance of a collective agreement or the decision to strike. The court found that the vote on a plan under the CCAA is not the same as a claim arising under the collective agreement and so the union did not have the presumptive right to vote. However, without a deemed proxy a number of employees and retirees votes would be lost, and the court stressed the importance of each member having the right to vote. It agreed with the Representative Employees and union that a deemed proxy would ensure all members had the opportunity to vote and exercise the leverage that they should have, based on their numbers and the value of their claims.

Second, the court agreed with the Representative Employees and the union that their counsel would be the appropriate persons to exercise the deemed proxy.

Lastly, the court assessed whether the deemed proxy should be discretionary. The Representative Employees and the union had not yet taken a position on whether they would vote for or against the Plan and asked that the proxy holder be allowed to vote the claims in his or her discretion depending on the result of further discussions and negotiations that would take place right up until the vote.

The court held that a discretionary deemed proxy is 'fundamentally undemocratic'.16 By making the deemed proxy discretionary, it would prevent the employees and retirees from knowing how their claims would be voted while simultaneously taking away their right to vote and giving it to someone else. The court would not authorise a discretionary deemed proxy – it must either be a deemed proxy to vote for the Plan or a vote against it. Accordingly, the court gave more time for the stakeholders to finalise the Plan to ensure that the employees and retirees knew whether the union and Representative Employees would vote in favour or against the Plan. Once the final position of the proxy was taken the Plan could not be amended without further authorisation from the court. That way, the employees and retirees would have the opportunity to make a real choice, based on the final version of the Plan and in full knowledge of how their claim will be voted if they did not opt out of the deemed proxy.

iii Redwater Energy Corporation

In Redwater Energy Corporation (Re)17 an insolvent oil and gas company owned stakes in both producing wells and inactive wells licensed by the Alberta Energy Regulator (AER). Following the appointment of a receiver and bankruptcy trustee, applications were brought relating to the sale of producing wells and the disclaimer of inactive wells. The trustee and receiver sought to disclaim inactive wells so as to avoid liability for environmental remediation. At issue was whether the provincial regulatory regime operationally conflicted with the BIA or frustrated its purposes by imposing obligations on the receiver and trustee for environmental remediation and by making the transfer of licences for the producing well subject to conditions relating to the inactive wells. Relying on a trilogy of recent cases by the Supreme Court,18 the trustee and receiver argued that Alberta's legislation effectively created a priority for environmental liabilities in bankruptcy and triggered the doctrine of federal paramountcy that renders provincials laws inoperative to the extent of their conflict with federal law.

The Alberta Court of Queen's Bench agreed with the trustee and receiver and found that certain provisions of the provincial legislation governing the actions of licensees of oil and gas assets did conflict with the BIA, which permits the trustee or receiver to disclaim assets, and, therefore, these provisions did not apply to a receiver and trustee because of the paramountcy doctrine. As a result, a trustee or receiver will be permitted to disclaim inactive wells without assuming any liabilities or environmental remediation obligations. In addition, the AER cannot impose conditions on the transfer of producing well licences relating to inactive wells.

The Alberta Court of Appeal upheld this decision, agreeing with the lower court that the regulator's policy would in effect 'create a super priority for environmental claims',19 which could not be reconciled with the federal objectives of the BIA.

Leave to appeal to the Supreme Court of Canada was granted 18 January 2018,20 and the case was argued on 15 February 2018. If this decision stands, it may have a significant impact on who bears the environmental remediation costs of abandoned wells and may result in higher costs on other oil and gas companies that pay a levy for 'orphaned' wells, which will likely increase in number as they are disclaimed through insolvency proceedings.


Toys 'R' Us (Canada) Ltd

In 2017, US retailer Toys 'R' Us – Delaware, Inc (Toys US) and its Canadian subsidiary, Toys 'R' Us (Canada) Ltd (Toys Canada) initiated Chapter 11 proceedings in the US bankruptcy court.21 Initiating those proceedings violated the terms of Toys Canada's credit facilities, which was operating with cash flow positive and a solvent balance sheet at the time. The breach of the lending facilities created a liquidity crisis that rendered Toys Canada technically insolvent, entitling it to protection under the CCAA.

After continuing poor sales, the Chapter 11 proceedings for Toys US began liquidation. As part of the liquidation sale, the shares of Toys Canada were offered for sale. Following a stalking horse bidding process, a buyer and Toys US entered into a share purchase agreement. Toys Canada, which was not a selling party to the agreement, signed on to the agreement to consent to terms that would facilitate its transition from Toys US to the buyer.

A condition of the share purchase agreement required the proposed transaction be approved by both US and Canadian courts. The US bankruptcy court granted approval 24 April 2018, and soon after Toys Canada applied to the Ontario Superior Court of Justice for approval of its acceptance of terms in the share purchase agreement that would facilitate the Toys US share sale to the buyer. The Court had to determine whether Toys Canada could exit the CCAA proceedings without undergoing a restructuring.

The Court praised the agreement as having a positive outcome for Toys Canada and all stakeholders involved and reviewed the three broad ways in which a debtor can emerge from CCAA proceedings:

  1. the proceedings fail, and the debtor will be liquidated in bankruptcy or otherwise;
  2. the proceedings succeed, the debtor will be restructured and emerge with a going concern business more or less intact; or
  3. solvency is restored and the CCAA process terminates without reorganisation being needed22 – as was the instance in this case.

Toys Canada was a solvent business being purchased from an insolvent owner, and the buyer did not seek to restructure the company. By keeping the business intact, there would be no compromise of any creditor's claims under the CCAA, and Toys Canada could emerge from the proceedings as if it never entered.


i Commercial insolvencies

In 2017, there were a number of factors that impacted Canada's insolvency filings including strong economic growth, rebounding oil prices and strong consumer spending. Overall, Canada was the fastest-growing economy in the G7. Unsurprisingly, commercial insolvencies in Canada have been generally stable with a slight decrease from 2017. The sectoral structure of commercial insolvencies has also been relatively consistent from 2007 to date, with the top five industry sectors remaining unchanged and consistently representing approximately 60 per cent of all commercial insolvency filings. These sectors are construction; manufacturing; retail; transportation and warehousing; and accommodation and food services.23 One persistent trend evident in Canada is the use of insolvency laws to decouple insolvent Canadian subsidiaries from a larger corporate group. Prime examples are the dramatic insolvencies of two well-known department stores: Target Canada in 2015 and Sears Canada in 2017. The sheer size of these operations, which employed numerous low and middle-income workers, held significant contracts with manufacturers and possessed large leases in high-value locations, has ignited high-visibility conflicts among creditors and challenges for all parties involved.

ii Personal bankruptcies

Although the Bank of Canada has repeatedly expressed concern over household indebtedness and the ability of Canadians to withstand a significant increase in interest rates, personal bankruptcies have remained stable as the Canadian economy remains strong and the unemployment rate is at a decade-low. Low interest rates have allowed Canadians to comfortably take on more and more debt. This has led to Canadian households being among the most indebted in the world according to the OECD.24 It follows that the higher debt-to-income ratios will most likely lead to higher insolvency rates as interest rates increase.


1 Michael Nowina is a partner and Sarah Faber is a student at law at Baker & McKenzie LLP (Canada).

2 RSC 1985, c B-3.

3 RSC 1985, c C-36.

4 RSC 1985, c W-11.

5 Fresh Start: A Review of Canada's Insolvency Laws, Industry Canada (2014), p. 3, available at: https://www.ic.gc.ca/eic/site/cilp-pdci.nsf/vwapj/review_canada_insolvency_laws-eng.pdf/$file/review_canada_insolvency_laws-eng.pdf.

6 Insolvency Statistics in Canada - April 2018, Office of the Superintendent of Bankruptcy Canada (2018), p. 3, available at: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/vwapj/Insolvency-Statistics-April-2018-EN.pdf/$file/Insolvency-Statistics-April-2018-EN.pdf.

7 ibid.

8 The number of business insolvencies per 1,000 businesses operating in Canada.

9 Fresh Start: A Review of Canada's Insolvency Laws, Industry Canada (2014), p. 7, available at: https://www.ic.gc.ca/eic/site/cilp-pdci.nsf/vwapj/review_canada_insolvency_laws-eng.pdf/$file/review_canada_insolvency_laws-eng.pdf.

10 ibid.

11 Insolvency Statistics in Canada - April 2018 Highlights, Office of the Superintendent of Bankruptcy (29 June 2018), available at: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03937.html.

12 See footnote 2 at p. 4.

13 ibid.

14 Urbancorp. Toronto Management Inc (Re), 2018 ONSC 2965.

15 Arrangement relatif à Bloom Lake, 2018 QCCS 1657.

16 ibid. at paragraph 54.

17 2016 ABQB 278.

18 407 ETR Concession Co v. Canada (Superintendent of Bankruptcy), 2015 SCC 52; Alberta (Attorney General) v. Moloney, 2015 SCC 51; and Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd, 2015 SCC 53.

19 2017 ABCA 124, at paragraph 81.

20 Orphan Well Assn v. Grant Thornton Ltd, 2017 ABCA 124, leave to appeal to SCC granted (18 January 2018).

21 Toys “R” Us (Canada) Ltd, 2018 ONSC 2744.

22 Century Services Inc v. Canada (Attorney General), 2010 SCC 60, as cited in ibid., at paragraph 9.

23 Ten-Year Insolvency Trends in Canada, Office of the Superintendent of Bankruptcy (27 July 2018), available at: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03805.html#a03.

24 OECD Economic Outlook Volume 2017, Issue 2 (27 July 2018), available at: http://www.oecd.org/eco/outlook/Resilience-in-a-time-of-high-debt-november-2017-OECD-economic-outlook-chapter.pdf.