New bankruptcy law amendments may impact securitization
Mark E. McElheran and Philip J. Henderson
On September 18, 2009, a number of amendments to Canada's Bankruptcy and Insolvency Act (BIA) and Companies Creditors Arrangement Act (CCAA) came into force. The amendments were passed in 2005 and 2007 but, aside from a few provisions that became effective in July 2008, the amendments sat dormant, awaiting proclamation into force. Pursuant to Order in Council P.C. 2009-1207, almost all of these amendments have now been brought into force. Some of these provisions will be of interest to participants in the securitization market.
The BIA and CCAA now expressly permit a reorganizing debtor to disclaim or resiliate certain types of agreements (section 65.11 of the BIA and section 32 of the CCAA). The procedure is set forth in the statutes and permits other parties to contracts upon receiving notice of a proposed disclaimer (which must first be approved by the trustee or monitor) to apply to the court within 15 days of receiving notice for an order that the disclaimer does not apply. If the trustee/monitor does not approve of the proposed disclaimer, the reorganizing debtor must apply to the court in order to disclaim the agreement. In determining whether to make an order for disclaimer/resiliation, the court must have regard to the following factors: (a) whether the trustee or monitor approved the proposed disclaimer or resiliation; (b) whether the disclaimer or resiliation would enhance the prospects of a viable proposal (or compromise or arrangement) being made in respect of the debtor; and (c) whether the disclaimer or resiliation would likely cause significant financial hardship to a party to the agreement.
The provisions on disclaimer and resiliation expressly do not apply to eligible financial contracts, commercial leases, financing agreements if the debtor is the borrower or a lease of real property or an immovable if the debtor is the lessor.
There has been some concern expressed in the marketplace based upon a literal reading of the statute that the express exclusion of leases of real property from the disclaimer provisions may by implication permit lessors of personal property to disclaim or resiliate (which is a term adopted from Québec civil law) leases of personal property. This would have a potentially negative impact on the securitization of vehicle and equipment leases, which remains an important asset class within the Canadian securitization market. Although there is always some degree of uncertainty in interpreting statutes prior to any judicial interpretation of the provisions, the current view of many insolvency practitioners is that the amendments were not intended to create new law in the area of disclaimer of contracts but to codify existing practice in the area. In particular, there is nothing to suggest that the intention of the legislation was to interfere with previously acquired property rights. We will watch with interest as courts are called upon to interpret these new provisions in future cases.
