Creditor Rights and the Public Interest Restructuring Insolvent (Canadian) Corporations

Creditor Rights and the Public Interest Restructuring Insolvent (Canadian) Corporations

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Canadian insolvency literature does not have the breadth and depth of its U.S. or U.K. counterparts. This is unfortunate because of the importance of insolvency legislation as significant economic framework legislation. On the other hand, it has been pointed out, perhaps unkindly, that when the statute under which virtually all your principal reorganizations are carried out is only 22 sections long, there is much less scope for literary analysis and criticism than there is in the chapter 11 context.

Against that backdrop, Dr. Sarra's work on restructurings in Canada is a welcome contribution to Canadian and international insolvency literature. The book is based around Dr. Sarra's views that reorganizations should be more than simple contests between the debtor and the usual creditors who have lost money in the course of doing business with it. Dr. Sarra feels strongly that reorganizations should reflect the position of "non-traditional claimants."

Her emphasis is on the position of employees and tort claimants in reorganizations, which she considers to be fragile and vulnerable. Depending on your point of view, however, "non-traditional claims" might, at least in theory, cover other kinds of public-interest claims, but non-employee claims, however, do not figure prominently in Dr. Sarra's analysis.

There are some conceptual difficulties with this presentation that might usefully have been addressed in the work. As to employees, unions may not exactly be fragile and vulnerable and, in the Canadian experience, there is no legislative equivalent to ยง1113 of the Bankruptcy Code allowing union contracts to be rejected. The ongoing Air Canada saga illustrates that the employees may, in fact, have the power to bring down a reorganizing debtor. Other public-interest claims, such as tax arrears and environmental liabilities, are well-protected in Canada by strong (and in the case of environmental obligations) quasi-draconian legislative safeguards. There's not much vulnerability or fragility to them, either.

As insolvency professionals appreciate, it is one thing to say that a certain group or class of stakeholders should be given more influence or importance in a reorganization, and quite another to come up with a workable scheme that achieves that result without at the same time doing violence to the rights of ordinary creditors who, after all, are people too. To her credit, Dr. Sarra recognizes this and appreciates that general principles may be as far as matters can realistically be taken.

Dr. Sarra's work on restructurings in Canada is a welcome contribution to Canadian and international insolvency literature.

The suggestion in the book is that courts dealing with reorganizations should be given the authority to recognize the importance of employee claims on an enhanced basis that reflects the present value of their entire anticipated employment relationship with the debtor (called a "deferred compensation claim"). From a practical point of view (and Dr. Sarra recognizes the problem), this would hold every reorganization hostage to the actuaries who would have to descend on the case to figure out who could vote and for how much. And it is unclear from the analysis whether a deferred compensation claim would be calculated according to any related contract or regardless of any related contract. What we have, consequently, seems to amount to the proposition that "ordinary creditors" should get somewhat less out of reorganizations, and that "non-traditional claimants," especially including employees, should get somewhat more. What seems to be missing is how all of this could work in practice.

In support of her thesis, Dr. Sarra analyzes four important recent Canadian reorganizations and finds threads in them that support the conclusion that Canadian courts are already taking the interests of social claimants into account. From this reviewer's involvement in those cases, the courts clearly did take into account the interests of employees, environmental authorities and the like, but the manner in which they did so may detract from, rather than support, the thesis being advanced. The fact that Canadian courts have given enhanced treatment to social claims already would seem to be a recognition that the objectives of the prospective new regime suggested by Dr. Sarra may have already largely been met, and that no legal machinations or grappling with ambiguous and ephemeral concepts were necessary to do so. In a practical sense, the proposed cure here has the potential to be much more harmful than the disease.

When the work turns to a review of the leading cases in which social claims have been recognized in Canadian reorganizations, it is comprehensive and authoritative. There clearly needs to be more analysis and assessment of Canadian reorganizational cases in practice, and the work contains some of the best analysis available on recent Canadian mega-cases. It also contains a good comparative international analysis of social claims in insolvencies, drawn largely from experience in England, France, Germany and the United States. There is a short but very helpful and valuable comparative analysis of major features in those countries, which will be of interest to an international readership.

Dr. Sarra's analysis and presentation is comprehensive and interesting, and her book is a fine contribution to Canadian and international insolvency literature. We hope there will be many more.

Journal Date: 
Monday, March 1, 2004