Annual Review of Insolvency & Restructuring Law 2003 - Developments in Canada
- Corporate governance rules released by the Canadian Securities Administrators
- Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act
Corporate governance rules released by the Canadian Securities Administrators
Like many jurisdictions, Canada has been in the process of strengthening controls on corporate governance to enhance investor confidence and reduce the risk of corporate financial failure. In July 2003, the Canadian Securities Administrators released, for public comment, proposed rules for corporate governance. These rules follow the approach taken by the US under the Sarbanes-Oxley Act of 2002.
The proposed rules provide that any company issuing securities must have an audit committee that consists of at least three independent directors. Audit committee members must not have any 'material relationship' with the issuer, where this could reasonably interfere with the committee member's judgment. A 'material relationship' includes an employment or business relationship with the issuer or an immediate family relationship with a person employed by, or involved in, the management of the issuer.
Each audit committee member must be 'financially literate' – they must have the ability to read and understand financial accounts – and the committee must include a 'financial expert' (a person who, among other things, can understand and apply generally accepted accounting principles), unless the CSA is provided with reasons why no such financial expert has been appointed.
The audit committee must also have a charter that sets out its functions and this charter must be lodged with the CSA annually, along with details of the audit committee's composition.
There are some exemptions under the proposed rules for small issuers or issuers whose securities are not listed on particular stock exchanges. The proposed rules for audit committees do not apply to investment funds, subsidiaries (where the parent company has effectively complied with the requirements on the subsidiary's behalf) and certain foreign companies.
Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act
A major public review of Canada's principal bankruptcy and insolvency statutes was conducted during 2003. The result was the November publication of the Report of the Senate Committee on Banking, Trade and Commerce, titled Debtors and Creditors: Sharing the Burden: A review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (the report).
The report recommended that the two statutes be consolidated into a single statute, which will deal with individual or 'consumer' bankruptcy and corporate insolvency.
In the field of consumer bankruptcy, proposed reforms include:
-
the introduction of a list of exempt property (of a particular nature and up to a specified value), which a debtor can elect at the time of filing for bankruptcy; and
-
automatic discharge from bankruptcy after 21 months for second-time bankrupts who have completed mandatory counselling, subject to the right of the Superintendent of Bankruptcy, the trustee or any interested party to oppose the automatic discharge in court.
The major reforms proposed for corporate insolvency include:
-
the incorporation of the UNCITRAL Model Law on Cross-Border Insolvency and related provisions, which would require the creation of a creditors' committee consisting of Canadian creditors;
-
a generally applicable due diligence defence against personal liability for directors (intended to encourage competent individuals to serve as directors);
-
the ability of trustees, court-appointed receivers and monitors to assign executory contracts, when appropriate, in connection with going concern transactions, and on a liquidation basis, provided that the proposed assignee is at least as credit-worthy as the debtor was when the contract was entered into and the proposed assignee agrees to compensate the other party for any loss from the default by the debtor;
-
empowerment of the court to replace some, or all, of the debtor's directors during proposals or reorganisations, if the governance structure is impairing the process of rescuing the company as a going concern;
-
the requirement for the trustee/monitor, in an application to the court for approval of a reorganisation plan, to provide to the court an opinion that, as a group, each of secured creditors and unsecured creditors are likely to receive no less under the plan than in a liquidation; and
-
empowerment of a court approving a reorganisation plan to approve a restructuring of the equity of the debtor, with or without shareholder approval.
Legislation enacting these reforms is scheduled for introduction to the Canadian Parliament in 2004.
Annual Review of Insolvency & Restructuring Law 2003: Developments in the United States
