The Winding Up and Restructuring Act Rea

1. INTRODUCTION

The Winding-Up and Restructuring Act 1 (WURA) has been left out of the insolvency law reform process. WURA’s roots 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 use WURA. However, there has been no attempt to locate the Act in a broader insolvency law framework since

1970. 2 None of the 2005 3 and 2007 4 insolvency law amendments makes any substantive change to WURA. 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 of WURA, its general purpose and scope, and asks whether the present insolvency law structure, which encompasses the

Bankruptcy and Insolvency Act 6 (BIA), the Companies’ Creditors Ar- rangement Act 7 (CCAA) and WURA, could be replaced by a single statute. Part 3 addresses specific WURA reform issues.

2. ORIGINS, PURPOSE, SCOPE, AND THE FUTURE OF WURA

(a) Origins of WURA

Why do we have both WURA and BIA? 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]. 6 R.S.C. 1985, c. B-3. 7 R.S.C. 1985, c. C-36.

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Insolvent Act of 1869 . 8 Six years later came the Insolvent Act of 1875. 9 That federal foray into bankruptcy and insolvency was short-lived. In 1880, Parliament repealed the Insolvent 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 focused Insolvent Banks and Insurance Companies Winding-Up Bill . 11 That 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 Corporations 13 – “for the purpose of winding-up insolvent banks, and insolvent trading companies.” 14 Curiously, from a 21st century perspective, Parliament saw the problem in terms of insol- vent corporations, not in terms of insolvency and not including insolvent 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 Canadian Insolvent Acts. 15 It was re-named the Winding-Up Act

in 1886. 16 More recently, the name was changed to WURA. In 1919, Parliament enacted Canada’s first general Bankruptcy

Act . 17 There was no attempt to incorporate the provisions of the Winding- Up Act into the Bankruptcy Act framework. The Bankruptcy Act applied 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. 10 S.C. 1880 (43 Vict.), c. 1. 11 House of Commons Debates , vol. 9 (8 April 1880) at 1228 (Mr. Abbott). 12 Ibid. 13 S.C. 1882 (45 Vict.) c. 23. 14 Debates of the Senate of Canada (1 March 1882) at 34 (Hon. Sir Alexander Campbell). 15 Ibid. 16 R.S.C. 1886, c. 129. 17 T. Telfer, “The Canadian Bankruptcy Act of 1919: Public Legislation or Private Interest?” (1995) 24 Can. Bus. L.J. 357.

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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 the Bankruptcy Act and gave bankruptcy proceedings prece- dence over the Winding-Up Act. 19 Beyond that there has been no attempt to address the obvious, two-part question. Should WURA be integrated into an enlarged BIA, or should WURA become a narrower, specialized statute?

(b) Purposes of WURA

The purpose of WURA 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 distribution of those assets” that might otherwise occur. 23 The Supreme Court of Canada recently

18 Tasse´ Report , supra, n. 2 at para. 1.2.05. 19 See BIA, supra, n. 6, s. 213. 20 J. 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. 21 J. 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]). 22 Toronto 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.]. 23 Carfagnini, supra, n. 21 at 79.

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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 that WURA should be designed to maximize the aggregate wealth of creditors and shareholders. 25 However, WURA is 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 WURA had 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. 27 But 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

24 Coope´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.). 25 The Winding Up and Restructuring Act: Recommendations for Reform (A Report of the Insolvency Institute of Canada, 2000) at 4 [IIC Report]. 26 See WURA, supra, n. 1, s. 10.1. 27 Canada (Attorney General) v. Confederation Life Insurance Co. , [1995] O.J. No. 1959, 1995 CarswellOnt 318, 8 C.C.P.B. 1, 1995 C.E.B. & P.G.R. 8227 (headnote only), 33 C.B.R. (3d) 161, 8 E.T.R. (2d) 72, 31 C.C.L.I. (2d) 77, 24 O.R. (3d) 717 (Ont. Gen. Div.) at para. 122, affirmed 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, (sub nom. Confederation Life Insurance Co. (Liquidation), Re ) 97 O.A.C. 18, 1997 C.E.B. & P.G.R. 8308 (headnote only) (Ont. C.A.).

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(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 WURA applies only to corporations. However, it has never been

updated to take account of post-19th century notions of what a corpo- ration is. 29 Section 6 extends the scope of WURA to financial institutions. The Act also applies to “incorporated trading companies doing business in Canada wherever incorporated.” The concept of “trading companies” is defined in WURA section 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, brokers, brickmakers, builders, carpenters, carriers, 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 company circa 1890. 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. 31 Most Canadian business corporations are no longer required to give public notice, or seek expensive charter amendments, when they decide to abandon their

28 IIC Report, supra, n. 25 at 3. 29 R. 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 with WURA is “statutory obsolescence”) [Priorities]. 30 WURA , supra, n. 1, s. 2. See e.g., Winding-Up Act, R.S.C. 1886, c. 129, s. 2(c). 31 Canada Business Corporations Act , R.S.C. 1985, c. C-44, s. 15(1) [CBCA] “A [CBCA] corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.”

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previous business pursuits as “fullers” or “wharfingers” (both on WURA 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 the Canada Business Corporations Act (CBCA): it says that WURA does not apply to corporations incorporated or continued under

the CBCA. 32 Insolvent CBCA corporations may only be liquidated under BIA . 33

Not all federal corporations are incorporated under the CBCA. Non- business corporations, for example, are incorporated under the Canada Corporations Act , an old-style letters patent statute. Some federal cor- porations are incorporated under Special Acts, for specified federal

purposes. 34 Those letters patent and Special Act corporations are subject to WURA. 35

Corporations incorporated under provincial law may also be subject to WURA, but only if they are insolvent. 36 Solvent 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 the Canada Corporations Act may only be

wound-up under WURA. 37 We haven’t looked at all the federal Special

32 Ibid. , s. 3(3)(b). The limitation found in s. 3(3) of the CBCA does not diminish the usefulness of WURA as s. 3(4) of the CBCA prohibits CBCA corporations from carrying on the business

of banking, business to which the Insurance Companies Act applies, or business to which the Trust and Loan Companies Act applies. In contrast WURA’s scope extends to banks, insurance companies and trust companies. As discussed below, an insolvent financial institution may only be wound up under WURA. 33 See CBCA, ibid., s. 208. See also Kevin McGuiness, The Law and Practice of Canadian Business Corporations (Toronto: Butterworths, 1999) at 1231. 34 Petro-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 a CBCA corporation. 35 Harry Sutherland, Fraser and Stewart’s Company Law of Canada, 6th ed. (Toronto: Car- swell, 1993) at 779. 36 See e.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.). 37 Corporate Law Policy Directorate, Other Business Insolvency Issues (Ottawa: Industry Canada, 2001) at 4 [Corporate Law Policy Directorate: Other Business Insolvency Issues].

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Act corporations out there to see whether any of them has its own winding-up or dissolution provisions. 38 WURA needs to be amended to clarify to what corporations it applies. 39

(ii) WURA and BIA WURA and BIA have similar functions. Both are used to liquidate

or wind-up insolvent corporations. 40 However, the definition of corpo- rations in section 2 of BIA excludes, among others, “banks, authorized foreign banks within the meaning of section 2 of the Bank Act, insurance companies, trust companies, [or] loan companies.” These institutions may only be wound up under WURA.

However, some corporations remain eligible under both BIA and WURA . Section 213 of BIA provides that WURA does not apply if any proceedings have been commenced under BIA regarding a particular corporation. Further, any proceedings that had already been commenced

under WURA are deemed to abate. 41 BIA section 213 thus enables cred- itors to remove insolvent companies from the operation of WURA by commencing proceedings under BIA. 42 An 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 of WURA and its incorporation into a new

BIA date back to the Tasse´ Committee Report of 1970. The Tasse´ Report

38 There 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. 39 In 1995 the Insolvency Institute of Canada recommended that s. 7 of WURA be amended to correspond with s. 3(3) of the CBCA so as to more clearly identify which corporations fell within the scope of WURA. 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. 40 As we have seen already, not all corporations are within the scope of WURA. See, for example, s. 3(3)(b) of the CBCA discussed above. Sutherland, supra, n. 35 at 774. 41 Section 213 BIA is further subject to a disposition as to costs of WURA proceedings to be made in the bankruptcy proceedings under BIA. 42 L. Houlden & G. Morawetz, 2006 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2006) at para. K4.

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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.” 43 The 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 of WURA and BIA did not occur. 45

There are many arguments in favour of consolidating the two stat- utes. As we detail below, there are many parallel provisions in BIA and WURA . Many of them are differently worded or have different effects. Further, there are substantive legal differences which set the two Acts

apart. 46 Should creditors’ substantive rights turn on whether the insolvent debtor is subject to bankruptcy or winding-up proceedings? 47

If BIA and WURA were 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 of BIA where applicable but rely on special provisions more suited to financial institutions. That is how Securities Firm Bankruptcies are isolated in Part XII of BIA.

43 Tasse´ Report , supra, n. 2 at para. 1.2.37. 44 Ibid., at para. 3.2.102. 45 Corporate Law Policy Directorate: Other Business Insolvency Issues, supra, n. 37 at 5. 46 For example the Supreme Court of Canada emphasized the legal differences in relation to how property is held in a bankruptcy under BIA and a winding up under WURA. 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.). 47 Auger & Bohe´mier, ibid.

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However, we recognize that there have been political obstacles to the integration of BIA and WURA. 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 CA should be consolidated into a single regime. The outcome of that debate is now clear. In 2001, an Industry Canada report acknowledged that while a single BIA/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 dual BIA/

CA regime. 48 In 2003, the Standing Senate Committee on Banking, Trade and Commerce recommended that BIA and CA continue to exist as separate statutes. 49 Reform has proceeded on this basis with separate substantive amendments to BIA and CA found in Statute c.

47 and Statute c. 36. 50 Based on that outcome, the prospects for consol- idating BIA and WURA appear 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 of WURA to preclude overlap with BIA. 51

Some corporations may be wound up under either BIA or WURA. WURA has 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 under WURA. Is there any reason why WURA should not be

restricted to insolvent financial institutions? 52 More recent legislative reforms have tailored WURA for financial institutions. WURA allows

48 Corporate Law Policy Directorate, Efficiency and Fairness in Business Insolvencies (Ot- tawa: Industry Canada, 2001) at 53-56.

49 Senate Report: Sharing the Burden, supra, n. 5 at 173. 50 Jacob S. Ziegel, “The Travails of Bill C-55” (2005) 42 Can. Bus. L.J. 440 [Ziegel 2005] Ziegel 2008, supra, n. 4. 51 Jacob Ziegel, in a 1999 paper, urged Parliament to consider the “repeal of the Winding-up and Restructuring Act or 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]. 52 The point has been raised before. See Corporate Law Policy Directorate: Other Business Insolvency Issues, supra, n. 37 at 4.

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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 that WURA should “apply exclusively to financial institutions.” The IIC concluded that such a change would cause few problems as other insol- vent corporations could proceed under BIA or CCAA. BIA and CA are better suited to non-financial corporations. BIA gives creditors a larger role; WURA offers more court supervision. The IIC concluded that WURA was 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 overlapping WURA and BIA provisions “[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 because WURA was 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

53 Corporate Law Policy Directorate: Other Business Insolvency Issues, supra, n. 37 at 5; IIC Report, supra, n. 25 at 4.

54 IIC Report, supra, n. 25 at 4. The IIC also recommended that the list of financial institutions to which WURA applies should include credit unions with total liabilities in excess of $100

million. The Canada Corporations Act would need to be amended to provide for liquidation and dissolution (while solvent) of all federal non-financial corporations currently subject to WURA. 55 Corporate Law Policy Directorate: Other Business Insolvency Issues, supra, n. 37 at 8. 56 The IIC identified the following: Special Acts of Parliament; Special Acts of the Legislative Assembly of Alberta; Canada Corporations Act; Canada Cooperative Societies Act; De- fence Fund Securities Act : Pension Fund Securities Act. IIC Report, supra, n. 25 at 6.

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some distinct WURA provisions. However, WURA has not been regularly and systematically reviewed. Many WURA provisions are deficient com- pared to similar or parallel provisions in BIA. 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.

BIA and WURA enact provisions to deal with these two types of transactions. 57 The parallel provisions have the same purpose in mind. 58 However, they are differently worded. Further, the WURA provisions dealing with gifts, transfers at undervalue and preferences set out few

limitation periods. 59 In contrast, BIA provisions all have specific limi- tation periods that limit how far back in time a trustee may investigate pre-bankruptcy transactions. 60

WURA could be amended to conform to the amended BIA provi- sions on transfer at undervalue 61 and preferences. In particular one might

57 See 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.). 58 The court in Royal Bank v. Pioneer Trust, ibid., at para. 9, concluded that the each of the

provisions in ss. 96-102 of WURA “has as its object the obtaining or preserving of the assets for the benefit of creditors.” 59 WURA, supra, n. 1, ss. 98 (30 day period), 100(2). WURA creates a presumption that the transaction was made in contemplation of insolvency if made within 30 days. 60 BIA, supra, n. 6, ss. 95 (preference 3 months or 1 year), 96 (transfer at undervalue [1 or 5 year period]) as am. by Statute c. 47 and Statute c. 36. 61 Statute c. 47 and Statute c. 36 will have the effect of repealing s. 91 (“settlements”) and s. 100 (“reviewable transactions”) and replacing them with a new provision s. 96 (“transfer at undervalue”) in the BIA.

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harmonize the limitation periods and adopt BIA review periods as the relevant standard for pre-liquidation transactions under WURA. How- ever, do the special circumstances of financial institutions warrant a longer limitation period for WURA? 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.” 62 However, we see no justi- fication for the current unlimited review period available to a liquidator under the current version of WURA. Surely a fixed review period could

be legislated to bring WURA into line with BIA. 63 Both statutes prohibit gifts and other transfers at undervalue. The

statutory provisions are quite different, and WURA will be even more out of date once the new transfer at undervalue provisions in BIA come

into force. 64 These statutory differences will inevitably lead to different outcomes. While the courts will be working out the parameters of a transfer at undervalue under BIA, liquidators will be left to deal with the nineteenth century language in WURA. Some corporations remain eli-

62 See 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. 63 IIC Report, supra, n. 25 at 10.

64 There are too many details to cover in this article, but here are some highlights. (1) Section 96 of the amended BIA will create a new “transfer at undervalue” provision replacing BIA

s. 91 “settlements”, which are a kind of gift as defined by the common law and s. 100 “Reviewable transactions,” a form of a transfer at undervalue. The new transfer at under- value provision includes a disposition for no consideration. WURA s. 96 deals with “gra- tuitous contracts”, a most peculiar term to us common lawyers. WURA provision only applies if the fraudulent intent of both creditor and debtor can be proved: Hammond v Bank of Ottawa (1910), 1910 CarswellOnt 454, 17 O.W.R. 121, 22 O.L.R. 73 (Ont. C.A.). The same case also tells us that pressure by the creditor will serve as a defence to disprove the fraudulent intent of the debtor. By contrast, the concurrent intention of the debtor or creditor is not relevant in the new s. 96 in BIA. It is only the debtor’s intention that becomes relevant. Pressure is an irrelevant consideration under BIA. (See also s. 95 of BIA which has eliminated the defence of pressure in the context of preferences. (2) WURA s. 97 is worded obtusely.) Rather than setting out a straightforward definition of insolvency, s. 97 requires that the debtor “was unable to meet its engagements [at the time of the transaction],” which has been interpreted to mean “a condition in which a debtor is placed when he has not sufficient property subject to execution to pay all his debts if sold under legal process at a sale fairly and reasonably conducted”: Central Guaranty Trust Co. v. Hees International Bancorp Inc. (2001), 2001 CarswellOnt 3329 (Ont. S.C.J.) at para. 150. Contrast a transfer at undervalue under BIA. The provision uses the general term “insolvent” which could be interpreted in light of the definition of “insolvent person” in BIA.

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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, both BIA and WURA deal with preferences. WURA pro- visions on unjust preferences remain trapped in the nineteenth century; BIA preference provisions have been modernized by Statute c. 36. WURA section 100, which deals with unjust preferences, is based almost entirely

on the wording found in the Insolvent Act of 1875, 65 which was repealed in 1880, 66 but provided the model for the preference provisions in the original Winding-Up Act of 1882. These nineteenth century provisions largely focus on the intention of the debtor. In contrast, recent changes to BIA will allow the court in some circumstances to focus its inquiry on the overall effect of the transaction.

Under BIA, 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 to BIA for transactions with a creditor who is not dealing at arm’s length. Section 95(1)(b) provides that if the transaction had the effect of giving that creditor a preference over another creditor the transfer is void. Under the revised BIA intention will no longer be relevant for non-arm’s length transactions.

Section 100 of WURA applies 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 contemplation of insolvency” has been held to mean with the intention to defeat the equal distribution of

65 S.C. 1875, c. 39. Compare WURA s. 100 and s. 133 of the Insolvent Act of 1875. Many of the other pre-liquidation provisions appear to be based upon the Insolvent Act of 1875. (s.

96 WURA and s. 130 Insolvent Act of 1875) (s. 97 WURA and s. 132 Insolvent Act of 1875) (s. 98 WURA and s. 131 Insolvent Act of 1875) (s. 101 WURA and s. 134 Insolvent Act of 1875 ). 66 S.C. 1880, c. 1. 67 The 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 (1970), 14 C.B.R. (N.S.) 229, 1970 CarswellOnt 82, [1970] O.J. No. 1053 (Ont. S.C.).

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creditors. 68 Section 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 WURA is 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. 69 Thus 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

Contrast BIA section 95(2) which abolishes the doctrine of pres- sure. 71 Section 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 the WURA and BIA. 72

WURA provisions enabling a liquidator to challenge pre-liquidation transactions are deficient. There are many inconsistencies between BIA provisions and the provisions in WURA that relate to transfers at under-

value and preferences. 73 Since the enactment of WURA there has been no attempt to harmonize its pre-liquidation provisions with those in BIA.

In 1997, Professor Ron Cuming recommended a reformulated sec- tion 95 for BIA, which he suggested could replace WURA section 100- 102. 74 In 1996, the IIC concluded that BIA preference 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

68 See generally Carfagnini, supra, n. 21. 69 This provision was added in 1996. R.S.C. 1996, c. 6, s. 156. 70 Central 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.). 71 A. 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”]. 72 Ronald 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]. 73 Baird & Caplan, supra, n. 39. 74 Cuming 1997, supra, n. 72 at 40.

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bankruptcy.” 75 This general recommendation to amend WURA “to con- form generally to the equivalent provisions of BIA” was endorsed by the IIC in its 2000 report.

As noted above Statute c. 47 and Statute c. 36 propose to make substantial changes to the law of pre-bankruptcy transactions. These amendments to BIA are not without their own interpretative problems. 76 However, it is our view that any reforms to WURA provisions relating to pre-bankruptcy transactions should be harmonized with the 2005 and 2007 amendments to BIA.

(ii) The Powers of Inspectors WURA gives 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. 77 Re 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 interpreted WURA section 41. BIA adopts a different approach. Inspectors must be appointed in a

bankruptcy proceeding. 79 Is WURA’s discretionary approach just another example of the statute’s antiquity?

A WURA inspector’s only role is to “advise and assist” the liqui- dator. The liquidator need not consult with inspectors on specific issues. WURA does not oblige the liquidator to have regard to inspectors’ di-

75 Baird & 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). 77 For 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. 78 Commonwealth 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 see WURA, supra, n. 1, s. 43: “The court shall determine the remuneration, if any is deemed just, of inspectors.” 79 See BIA, supra, n. 6, s. 116; Re Commonwealth Trust Co., supra, n. 78.

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rections. 80 In 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 a WURA inspector’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.” 83 A judge in a winding-up proceeding can’t (or won’t) give a WURA inspector extensive powers comparable to those of inspectors under BIA. 84

BIA and WURA create strikingly different roles and powers for inspectors. 85 Both statutes give inspectors an advisory role. However, BIA gives inspectors greater powers and a supervisory role. A BIA trustee 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.

80 Re Commonwealth Trust Co. , ibid. 81 Ibid., at para. 16. 82 Ibid., at para. 18. 83 Canada 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.]. 84 Carfagnini, supra, n. 21 at 90. 85 Ibid., at 90-91. 86 See e.g., BIA, supra, n. 6, s. 30. 87 (2006), 2006 CarswellOnt 1523, [2006] O.J. No. 958, 20 C.B.R. (5th) 220, 208 O.A.C. 133, 79 O.R. (3d) 241, 266 D.L.R. (4th) 192 (Ont. C.A.) at para. 28.

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(A) Who May Be Appointed as an Inspector under WURA? Re Commonwealth Trust Co. noted that WURA section 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. 88 The 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. 89 It specifically noted that an inspector need not be inde- pendent. The court in Canadian Commercial Bank identified 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 Bank appointed the Canada Deposit Insurance Corporation (CDIC) as an inspector. 92 The 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

88 Re Commonwealth Trust Co. (1971), supra, n. 78 at para. 17. The court concluded that WURA inspectors were not given the same powers as BIA inspectors.

89 (1986), 1986 CarswellAlta 425, 59 C.B.R. (N.S.) 10, 43 Alta. L.R. (2d) 24 (Alta. Q.B.). 90 Ibid., at para. 12. 91 Ibid. 92 The 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. 93 In Canada Deposit Insurance Corp v. Canadian Commercial Bank (1986), supra, n. 89 at para. 13 the court acknowledged the existence of certain “de facto” inspectors: Bank of Canada, office of the Inspector General of Banks, and the Government of Alberta.

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The Canadian Commercial Bank case 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 Bank when 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 WURA creates four categories of preferred claims on a winding-up

of an insurance company: 97 By contrast, BIA recognizes at least 7 classes of preferred claims. 98 The WURA categories are:

– liquidation expenses 99 – some wage earners’ claims – policy holders’ claims – some Superintendent of Insurance expenses 100

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.

100 WURA, supra, n. 1, s. 161(1)(d); Canada (Attorney General) v. Confederation Life Insur-

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We assume that the liquidation expenses priority and expenses incurred by the Superintendent and passed on to other companies pur- suant to the Insurance Companies Act section 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. 101 However, it seems well understood by insurance specialists and probably works well.

That leaves only one WURA category – 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.” 102 Little has been said about the plight of unpaid workers in a WURA liquidation.

The IIC Report identified unpaid wage claims as a significant issue in the winding-up of financial institutions. The Report concluded, “it is