Problems in Canadian Business Law

Pol/Soc Sci 3165 6.0A

Tuesdays, 2:30-5:30 pm

Simon Archersarcher@torys.com

Stuff Last class

Capital markets II, etc. Questions?

Today Insolvency Competition law (if time)

Next classes IP law Other areas you want to hear about?

Bankruptcy and Insolvency When things go wrong… Is a complement to “credit economy”

Forms of credit single most important driver of mass participation in capital markets and market economy -- linked directly to consumer society

B&I functions as social safety net in “weak state”

Tension between “legitimate” and “illegitimate” business failures

Is this a distinction courts should make?

Some factoids from the text Roman Law

• Unlucky debtor, delivering up existing assets – lives

• Dishonest debtor, hiding assets – executed Complex procedure in England through

Industrial Revolution Provincial responsibility 1879-1919 Federal responsibility before and since

those dates

Two models Moral model (UK)

• history of debtors prisons origins in UK act, must explain bankruptcy,

commercial morality and guard against frauds now considered outdated model Focus on liquidation and judgment of debtor

Fresh start model (US) 1978: Ch 11 reorganizations emphasize fresh

start, “bargaining model” by creditors some backlash by mid-1980s from lenders,

now limits individual access to some degree

Bankruptcy Legislation in Canada

Purpose and Intent• Honest unfortunates gain a release from

their debts• Eliminate preferences of one creditor over

another• Mechanism for distribution of available

assets• Punish creditors who attempt to defraud

creditors• Uniform throughout Canada

Bankruptcy Legislation in Canada – cont’d Bankruptcy and Insolvency Act

small, medium and large business and individuals• Commercial proposals, Part III, Div 1• Consumer proposals, Part III, Div 2

Winding Up Act• Financial institutions

Companies’ Creditors Arrangement Act• large businesses only, conceived during depression, in

need of massive overhaul, very business-friendly (and creditor-averse)

Also note:• Fraudulent Conveyances Act, Personal Property Security

Act, Assignment and Preferences Act

Recent history Economic volatility, restructuring of global

production chain, removal of trade barriers = new business models working around/under/over regulation

Increased use of debt as financing sensitivity to payment streams different from equity

financing use by households of credit card debt to replace

income fluctuations Lesser role for governments in de-regulated

world But really? A socialization of risk?

2002 stats Total

bankruptcies/proposals=105,000 consumers bankruptcies=78,000 business bankruptcies=10,000 CCAA=20

Some reasons for bankruptcy Small business risks significant, usually gap

between initial financing and profitability bankruptcy = low cost efficient exit for failed

businesses Individuals: unemployment combined with high

debts (currently at record highs), credit used as financing, fewer social safety nets Watch out: 2001-3 = high consumer debt levels,

housing bubble, low interest rate environment If interest rates increase…

Definitions Definitions

• Insolvency• Broader concept: inability to pay debts as they

generally become due…also defined in Act

• Bankruptcy• legal categories, bankrupt is a legal status...

Acts of Bankruptcy An “insolvent person” is

• In Canada, with debts in excess of $1000, any one of ten acts of bankruptcy is committed:

• Assignment in bankruptcy made (voluntary act by debtor)

• Fraudulent conveyance made• Fraudulent preference• Departs from Canada or dwelling• Allows seized property to go unredeemed

Acts of Bankruptcy – cont’d• Makes written admission to creditors meeting of

inability to pay debts• Secrets property with intent to defraud creditors• Gives notice to creditors of suspension of

payments• Defaults in a proposal under the Act• Ceases to meet his liabilities generally as they

become due

BIA processes Start by petition (creditor asks court to take

jurisdiction) or assignment Get a: vesting of property in trustee,

bankruptcy takes precedent over all other enforcement, requirement of bankrupt to take orders of trustee

Trustee can move to set aside prebankruptcy transactions

first time, discharged after 9 mos. Creditor, trustee may oppose discharge,

where Board will oversee hearing, broad powers.

Commercial proposals Part III, Div 1

used by small businesses to reorganize debts with intent to make “triggers” stay in place

debtor continues to run business, Trustee acts a monitor

Relatively strict timelines, quick action where conditions/timelines not met

Consumer proposals Part III, Div 2

Where debts excluding mortgage do not sufficient to pay obligations

Requirement to repay all or portion over 5 year period

Alternative to bankruptcy, avoid stigma, keep going with current assets

CCAA Only available to companies with claims against

of $5M or more Management retains control (debtor in

possession), can do a lot but with oversight of court (e.g., Air Canada, negotiated with unions, raised capital injection, paid massive bonuses to executives, etc.)

Monitor appointed, develop plans, approval by creditors and court

few actual rules, de facto Ch 11 bargaining model

Priorities Secured creditors, unpaid suppliers

of recognizable inventory Funeral expenses Costs of administration Court fees Wages owing to employees (6

months or $2000 ea.) Municipal taxes (2 years worth)

Priorities – cont’d

• Landlord – three months rent• Fees & costs ss.70(2)• Workers compensation deductions, EI

deductions, and income tax owing to Federal government

• Direct claims of injured employees• Any other claims of the Crown• Unsecured creditors

Discharge• Court order releases bankrupt from debts• Behaviour key to obtaining order• Corporation cannot obtain discharge

without complete payment of creditor’s claims

Consumer Bankruptcy Summary Proceedings

Bankruptcy Offences

INSOLVENT DEBTOR

INITIATION OF BANKRUPTCY PROCEEDINGS

Voluntary Assignment byBankrupt Person

Proposal to Creditors by Debtor (through a LicensedTrustee)

Creditor May Petition Court for Receiving Order

(2) Has Committed an Act of Bankruptcy Within Past 6 Months

(1) If Debtor has Debts in Excess of $1,000

PROCEDURE

ReceivingOrder Issued

Meeting ofCreditors

Appointment of Inspectorsby Creditors to

Supervise Trustee

Trustee Liquidates Assets

Distributes Proceeds to Creditors in Accordance

with Priorities in Act

Discharge of Bankrupt

Appointmentof Trustee

Issues in a restructuring Is it worth more liquidated than as a

going concern? Whose interests (what hierarchy)

should be considered in reorganization (creditors, employees, unions, community, none, all, government?)

Insolvency essay question To whom should the primary duties

of directors of insolvent corporations be owed: shareholders of the corporation, or creditors of the corporation? Why?

Regulation of competition Nature of the Legislation Restrictive Trade Practices Mergers and Firms in a Dominant

Position Conspiracies and Combinations in

Restraint of Trade Remedies

Overview Basic assumption: “forces of free market should

regulate industry”• Since when did the free market defend the public interest?

Can it? See slides re: integrity vs efficiency Alarming rise in monopoly powers in late 1800’s Early anti-trust responses in 1889 (Sherman Act, US),

Combines Investigation Act (Can) Major consolidations of piecemeal legislation 1960 and

1976 - Combines Investigation Act Combines, from Combinations (oligopolies) The Competition Act

Nature of legislation

The Competition Act• National coverage as federal act• Prohibits certain trade practices as criminal offences,

certain as regulatory offences• E.g., bid - rigging is criminal act• E.g., review and approval of certain mergers

• Applies to goods and services• Commissioner of Competition has broad investigative

powers, with right to warranted search and seizure

Blended regime Implications are that prohibited trade practices

(about 15) which are criminal offences require BARD

Regulatory offences only take a BOP threshold. Is complaint-driven as well as research-driven Lots of litigation over search and seizure -- e.g.,

Hunter v. Southam established new norms for search warrant powers, changed rules of the act (s. 8 violation).

Restrictive trade practices

Competition Act, 3 main types• Practices related to nature of the business

organization (mergers, dominant firms)• Practices that arise between firm and

competitors• Practices that arise between a firm and its

customers

Mergers and dominant position

Dominance itself is not improper Dominance to detriment of public is

subject to review• 50% of market a reviewable merger

May prohibit or modify terms of mergers

Little enforcement of this aspect of the CA.

Combinations, conspiracies

In any product, an offence for anyone who “conspires” to unduly:

• limit dealing in any product• limit manufacturing• and unreasonably enhance price• limit competition

Carve-outs: defining industry standards and practices, exchanging information, measurements, etc.

Can you see the problem with these rules?

Problems Proof:

Conspiracy requires intent of consequences, hard to prove

How to distinguish market manipulation from business decision?

The amendment to s. 46 and s. 1.1 modify this (removing the obligation to prove WOULD HAVE reduced competition).

Problems of carve outs Is requiring a voluntary code of

conduct to be adopted a practice in restraint of trade?

Are unions in restraint of trade?

Offences relating to distribution and sale

Price discrimination (for same thing at same time) Advertising allowances (again, available to all, not on

discriminatory basis) Regional competition (“dumping”) Price fixing (ever notice how bank fees change?)

• But including downstream control, etc. Pyramid selling (a form of speculation or recruiting: see

Bush campaign finance for example) Deceptive telemarketing

Offences…cont’d Forgoing are prohibited (e.g., attract

criminal sanction) Very difficult to distinguish from

legitimate commercial activity

Reviewable activities Where

Abuse of dominant position, refusal to supply Consignment selling Exclusive dealing Tied selling Market restriction Foreign directives to Canadian subsidiaries Foreign arrangements affecting Canadian firms

Have the effect of limiting competition, impeding market entry, can be ordered stopped, etc., or otherwise order for increased competition

Offences Relating to Promotion and Advertising of Products

False or misleading advertising• Price, “material terms”• Cf. “mere puffery”?

Strict liability (remember Wholesale Travel case?) Criminal and civil options

• Does not need to prove reliance (major obstacle in common law)

Correction of errors Double ticketing (lowest price must rule) Bait-and-switch (“while supplies last” defence)

Civil actions under the Competition Act Violation of Act or breach of Order gives

rise to ability to pursue civil (private) lawsuit

Damages claim in quantum of loss Vs US, 3x damages

Balance of probability burden Criminal proceedings evidence is

admissible Access to justice?