Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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Order of Payment under the BIAThe BIA replaces provincial order of payment rules with a new set of priorities. Which kind of makes a mockery of the CCQ order of payment rules. If there’s enough money to go around, who cares what order people are paid in? And if there’s not enough money, the debtor is bankrupt and the BIA rules apply! I’ve included the entire section on payments from my Bankruptcy summary, even though we’re only interested in secured creditors. i) Structure of BIA CategoriesThe general order for the payment of claims is: super-priority secured claims>secured claims>preferred claims>unsecured claims>deferred claims. Technically secured creditors aren’t even part of the hierarchy, since their claims attach to particular pieces of property, but in a way this means that they go first – only property/money left after all secured creditors are paid will be available to the unsecured creditors. All unsecured claims are paid proportionately (sometimes termed “rateably” or “on a pari pasu basis” or “on a pro rata basis”). This just means that everyone recovers fractionally (e.g. 20% or 40%) and that they all recover the same fraction. Example: A debtor has $100 in assets, and owes debts of $40, $100, and $160 to three different unsecured creditors. Thus total debts are $300 and total assets are $100. So each debtor will recover 33% of the debt. The $40 debtor will receive $13 ($40*0.33), then $100 debtor will get $33 ($100*0.33), and the $160 debtor will receive $53 ($160*0.33). This totals $100, resulting in a full pay out of the debtors assets to all creditors in proportion to their debts. ii) Super-prioritiesThere are a limited number of super-priorities in the BIA. They are secured claims that are imposed on top of existing secured creditors (they have to be secured, because otherwise they’d merely become first in the preferred claims list). The regimes for the most of the super-priorities is explained in the section on Special Categories of Claimants, below. Here is what appears to be the ranking of the super-priorities as amongst themselves (same number means tied): 1. Environmental cleanup liability (immovables only) under 14.06(7-8). 1. Unpaid supplier repossession right 81.1 (movables only) (technically not a claim, but applies despite the rights of secured creditors). 2. DIP Financing charge 50.6 (proposals) (technically the judge could choose not to accord super priority, but no one would lend without one). 3. Farmer/Fisherman secured charge (81.2). 4. Employee charge for unpaid salary/wages/etc of up to $2,000 on current assets (cash, receivables, inventory) (81.3/81.4). 5. Pension plan claims (81.5/81.6). 6. The following could all be given super priority status, but not necessarily. They also can’t outrank the other super-priorities: directors charge (64.1); trustee/administration charge (64.2); 47.2 (Interim Receiver fees); Directors and officers charge (64.1(2)). It’s unclear how they rank relative to each other. Note that these super priorities can only apply to the property of the bankrupt, so property belonging to other persons that is claimed under section 81 BIA can’t be subject to a super-priority. Nor can property under a real trust or a valid deemed trust under 67(3). iii) Secured Claims and CreditorsThis section deals with secured creditors’ participation in the distribution of assets. If everything works correctly, a secured creditor doesn’t participate in the distribution, since distribution is the process by which unsecured claims are paid. But if a secured creditor voluntarily reduced its security, or there was a problem with the validity of the security, or if the security asset fell in value, the balance of the secured creditor’s claim will be unsecured. These unsecured claims are treated like all other unsecured claims, unless they would be preferred claims for some reason (like 136(1)(d.01-d.02)). Secured creditors prove the unsecured balance of their claims in the same manner as ordinary creditors. BIA Provisions 127(1) Where a secured creditor realizes his security, he may prove the balance due to him after deducting the net amount realized. 127(2) Where a secured creditor surrenders his security, he may prove his whole claim. 133 Creditor that fails to comply with 127-132 cannot receive a dividend (payment of unsecured claims from bankruptcy estate)! 135(2) Secured creditors must prove their security to the trustee, who may disallow it if unsatisfied by proof. 135(4) Appeal to court. iv) Preferred Claims and CreditorsPreferred claims are unsecured claims that are paid before other unsecured claims out of property left after secured creditors are paid. So the order of payment is: supre-priority>secured claims>preferred claims>unsecured claims>deferred claims. Within preferred claims the ones listed first in the section are paid first, then if money remains the next one on the list is paid. Remember that preferred claimants are still unsecured, and so they are subject to the general bankruptcy stay in 69.3 and are paid rateably (141). Section 136 sets out the preferred claims system under the BIA. This is the full and complete list – anything not listed here is not a preferred claim. Note that if the preferred claim is only a portion of the creditor’s claim (like if unpaid wages or rent exceed the amount allowed in the section) then the balance of the creditor’s claim is unsecured (136(3)). BIA Provisions 136 (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows: (a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses; (b) the costs of administration, in the following order, (i) the expenses and fees of any person acting under a direction made under paragraph 14.03(1)(a), (ii) the expenses and fees of the trustee, and (iii) legal costs; (c) the levy to support the bankruptcy system payable under section 147; (d) section 81.3/81.4 claims for wages/commissions/compensation/disbursements that were not paid by the secured charge; (d.01) the amount lost by a secured creditor due to operation of 81.3-81.4. (d.02) the amount lost by a secured creditor due to operation of 81.5-81.6. (d.1) liabilities listed in 178(1)(b)-(c) (family law payments), if provable under 121(4), for periodic amounts accrued in the year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable; (e) municipal taxes assessed or levied against the bankrupt, within the two years immediately preceding the bankruptcy, that do not constitute a secured claim against the real property or immovables of the bankrupt, but not exceeding the value of the interest or, in the Province of Quebec, the value of the right of the bankrupt in the property in respect of which the taxes were imposed as declared by the trustee; (f) landlords are entitled to 3 months arrears in rent (if there is any) and three months of accelerated rent (if there is an accelerated rent clause in the lease). Any occupation rent paid by the trustee is deducted from the accelerated rent portion. Also, the total preferred claim “shall not exceed the realization from the [movable] property on the premises under lease.” (g) legal costs referred to in subsection 70(2) but only to the extent of the realization from the property exigible thereunder; (h) in the case of a bankrupt who became bankrupt before the prescribed date, all indebtedness of the bankrupt under any Act respecting workers’ compensation, under any Act respecting unemployment insurance or under any provision of the Income Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld (the latter means payroll taxes) rateably; (i) insurance monies for on the job injuries not covered by workers’ compensation; (j) in the case of a bankrupt who became bankrupt before the prescribed date, claims of the Crown not mentioned in paragraphs (a) to (i), in right of Canada or any province, rateably notwithstanding any statutory preference to the contrary. (2) Subject to the retention of such sums as may be necessary for the costs of administration or otherwise, payment in accordance with subsection (1) shall be made as soon as funds are available for the purpose. (3) A creditor whose rights are restricted by this section is entitled to rank as an unsecured creditor for any balance of claim due him. v) Unsecured Claims and CreditorsRemember that unsecured creditors are subject to the automatic bankruptcy stay (69.3). Claims are paid proportionately from remaining funds after all preferred and secured creditors have been paid (144). These are the chirographic creditors of civil law. vi) Deferred Claims and CreditorsThe most common category of deferred claim is the claim of people who are owed money after the reversal/cancellation of transactions at undervalue (137). Another important category is equity claims (140.1) which are below even all other deferred claims. The idea here is that equity investors have potentially unlimited gains if the venture succeeds, but as a consequence they also take a risk that the project will go bankrupt, so they should be paid last when the venture fails. Section 139 also creates a “silent partner” deferred claim, applicable to a lot of venture capitalists (presumably this is deferred because it’s a lot like an equity claim). Atlas: This can be structured around with smart drafting. Also, interest accruing after the date of the bankruptcy is treated as a deferred claim, since only after all claims are satisfied will post-bankruptcy interest be paid (143). As an example 137 claim: you are bought a car worth 20k for 5k from the bankrupt, the transaction can be reversed and you can be forced to return the car. This then becomes a deferred claim for 5k against the estate. BIA Provisions 137(1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at arm’s length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper transaction. 139 Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied. 140.1 A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been satisfied. vii) Special Categories of ClaimantsThis section deals with a variety of special categories of claims, many of which are super-priorities. Crown Claims (67, 86, 87) Historically, the Crown gave itself generous preferences and securities, including many deemed trusts that removed a lot of assets from the bankruptcy estate. This was problematic for two reasons: (1) ordinary creditors needed the money more than the government did; and (2) because there was so little to recover for ordinary creditors, they had little interest in participating in the bankruptcy process or supervising trustees as inspectors. So the Crown scaled back its powers substantially. Proposals must uphold preferential payment of certain Crown claims or they cannot be approved: 60(1.1-1.2), 69(1)(c), 69 (1.1)(1)(c). Section 67(2) eliminates all government deemed trusts in a bankruptcy situation with two exceptions: money that would be actually considered held in trust under provincial private law, and a list of specific payments that are deemed held in trust despite 67(2). 67(2) “Actual Trust” Exception: Amounts that are actually held in a trust-like capacity will be deemed held in trust. So if the debtor company kept sales taxes in a separate bank account, this would allow the deemed trust to take effect on that money. But if the sales tax funds were mixed in with the debtor’s main account, 67(2) would not apply, since under normal provincial law, if trust property is mixed with non-trust property, a trust cannot form. 67(3) “Statutory List” Exception: These are [i] tax deductions under the federal Income Tax Act, [ii] employer’s deductions of Canada Pension Plan contributions from payroll, [iii] employer deductions of EI premiums from payroll. Provincially, the list includes QPP payments (67(3)(b)) and deductions under any provincial income tax act (67(3)(b)). Section 86(1) eliminates all secured creditor rights created by statute for the Crown with three exceptions: ordinary secured creditor rights; registered statutory securities; a list of statutory exceptions [deemed trusts mean the property was never the property of the bankrupt, so they aren’t security interests, hence the need for a separate section –Mike]. 86-87 also applies to all payments due to workers’ compensation boards. 86(2) Ordinary Secured Creditor Right: If the Crown became a secured creditor through standard channels that can apply to everyone (like a contractual security clause) then it keeps this security right. 87 Registered Statutory Securities: If the government registers an exceptional statutory security right in the same manner as a regular commercial security right would be registered, then the exceptional statutory security right is preserved in bankruptcy, but is subordinated to other security rights registered before it (87(2)(a)). The sums secured by registration include only sums due at the time of registration, plus interest (87(2)(b)). This section is typically used for tax liens/hypothecs registered against tax debtors. 86(3) “Statutory List” Exception: A series of statutes that create security rights for the Crown are exempted from 86(1). Again, much like 67(3), this list deals with CPP/QPP, EI, and income tax issues (this time, a provision allows the MNR to intercept payments received by tax debtors). For the CCAA, see section 37-40, which are substantially the same as what’s listed above. Environmental Liability (14.06(7-8)) Claims by the government for environmental clean-up costs are super-priority secured charges on the property in question, and on all adjacent property used for the same purpose. They are deemed provable claims. There’s also something in 14.06(6) about environmental cleanup not being considered an administrative cost, but I’m not sure why it would have been considered that in the first place. 14.06(8) allows these claims to be brought no matter when the damage occurred (like after the bankruptcy). This section applies to receivers too. 14.06(7) Any claim by Her Majesty in right of Canada or a province against the debtor in a bankruptcy, proposal or receivership for costs of remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor is secured by security on the real property or immovable affected by the environmental condition or environmental damage and on any other real property or immovable of the debtor that is contiguous with that real property or immovable and that is related to the activity that caused the environmental condition or environmental damage, and the security (a) is enforceable in accordance with the law of the jurisdiction in which the real property or immovable is located, in the same way as a mortgage, hypothec or other security on real property or immovables; and (b) ranks above any other claim, right, charge or security against the property, despite any other provision of this Act or anything in any other federal or provincial law.
Technically not a claim, since it’s actually a right to take back certain property. But I’ve included it here because it defeats the rights of secured creditors in the property. This applies to receivers too. 81.1(1) Suppliers of goods that have been delivered to the bankrupt or someone who filed a proposal/NOI, but not yet paid for in full, can repossess the goods subject to the following conditions: (a) the supplier presents a written demand for repossession to the purchaser, trustee or receiver…within 15 days after the day on which the purchaser became bankrupt; (b) the goods were delivered within 30 days of the date of the bankruptcy or receivership (or of the proposal/NOI (81.1(4))). (c) at the time when the demand referred to in paragraph (a) is presented, the goods (i) are in the possession of the purchaser, trustee or receiver, (ii) are identifiable as the goods delivered by the supplier and not fully paid for, (iii) are in the same state as they were on delivery, (iv) have not been resold at arms’ length, and (v) are not subject to any agreement for sale at arms’ length; and (d) the purchaser, trustee or receiver does not pay to the supplier the entire balance owing after receiving the demand. 81.1(2) If the goods were paid for in part, the fraction that can be repossessed is equal to the fraction of the payment still owing. 81.1(6) This claim ranks above any other claim created by federal or provincial law. Only a good faith purchaser for value who did not have notice of the repossession request cannot be forced to return the goods. 81.1(10) If you repossess goods you waive any right to payment for them. Unpaid Farmer/Fisherman Claims (81.2) Setting aside the question of what “inorganic life” means (see BIA 81.2(2) def “products of the seas, lakes, and rivers”), this section gives farmers and fishermen a special secured claim for the products of their farming and fishing. It’s different from the unpaid supplier claim because it’s an actual claim, not a right to repossess. It applies only to sales for use in business (81.2(1)), and while fishermen are only those whose principal occupation is fishing, farmers have a broader definition (see definitions in 81.2(2)). The farmer/fisherman gets a secured charge on the inventory of the purchaser that existed on the day the purchaser went bankrupt or was placed in receivership (note: unlike 81.1, not triggered by a proposal!). There appears to be personal liability of the trustee or receiver if the inventory is sold without paying the farmer/fisherman, with the trustee being subrogated to the rights of the farmer/fisherman against the estate to the extent of the personal liability (81.2(1) final part of section). Employee Claims For Unpaid Wages (81.3, 81.4) These sections both deal with unpaid wages for employees. 81.3 is the general section, while 81.4 deals with receiverships. Under 81.3, an employee gains a secured claim on the current assets of the employer (inventory, accounts receivable, and cash – in other words, the assets that are the easiest to find and liquidate). The charge covers wages/salary, commissions, and vacation pay (81.3(1,9)), but it does not include severance pay (81.3(9)). The charge takes priority over any secured creditors charges, and any other charges or securities except those created by 81.1, 81.2, and 67(3) of the BIA (81.3(4)). This secured claim is for a maximum of $2,000 per employee, minus any amounts paid to the employee by the trustee for the employee’s services during this time (81.3(1)). Travelling salespersons can get an additional $1,000 for expenses during this period (81.3(3)). Directors and officers cannot use this section (81.3(6)). Someone dealing with the trustee, but not at arms length, can only use this section if the trustee thinks the claim is commercially reasonable (81.3(7)). This prohibition against directors and officers using this section is repeated at BIA 140. If the secured claim doesn’t bring in the full amount, any remaining claims become preferred claims. Secured creditors who lost out due to the employee claims also get preferred claims to the extent of their loss of secured claims (136(1)(d.01). This provision interacts with the WEPPA. Employees can get $3,250 from the government in exchange for transferring their secured claim to the government. Yes, the government pays them more than they give up! The government is then subrogated in their rights (only up to the $2,000 claim, not the $3,250 payout) and can recover the employee claims for itself. Pension Payments by Employers (81.5, 81.6) These provisions cover missed pension contributions by employers. 81.5 is the general provision, 81.6 is the receivership provision. They create a secured charge on all the assets of the bankrupt that equal to either: the total of all amounts that the employer deducted from payroll for the pension plan but never paid to the plan (81.5(1)(a)) or some technical amount described in the Canada pension plan (81.5(1)(b-c). Note that 81.5(1)(a) is not limited to a specific time period before the bankruptcy – it covers all missed payments. There is also the possibility of personal liability by the trustee (81.5(3)) This security outranks all other claims, secured or not, except for claims under 81.1, 81.2, 81.3, 81.4, or 67(3) (81.5(2)). 1 I’ve heard this word pronounced both “lean” and “lee-in” by profs. “Lean” seems to be the more popular, but I have no idea which is correct. Directory: pubdocs -> files files -> International maritime conventions files -> Chapter 1: Property as rights, not thing files -> Insurance Law – May 4 files -> Contractual Obligations – Prof. Helge Dedek Introduction 1 files -> Constitutional Limits on Criminal Law 1 files -> Antonio Iacovelli Winter 2005 Advanced Criminal Law files -> Private International Law – Prof. Walsh Summer 2005 files -> Part I: conceptualizing and justifying ip space 3 files -> Part I – general 5 The Sources of Int’l Air Law 5 Q? How does customary law relate to int’l law? Download 0.72 Mb. Share with your friends:
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