A review of Reinventing Bankruptcy Law: A History of the Companies’ Creditors Arrangement Act by Virginia Torrie
This post first appeared in the Singapore Global Restructuring Initiative blog. They have kindly allowed me to republish it here on my blog.
Can an historical analysis of bankruptcy (or insolvency) law in Canada offer some pointers for the present pandemic-induced economic crisis? As Professor Virgina Torrie’s book notes in the conclusion, “usually the political impetus to reform or repeal bankruptcy law arises during or after economic recessions, when many debtors avail themselves of insolvency law, and such activity highlights deficiencies of existing legislation” [169]. While we are dealing with the financial impacts of Covid-19, we are well-aware of the importance of insolvency law reform, across jurisdictions. It may actually be an apt time to turn to an historical analysis of the subject.
Torrie’s book focuses on the evolution of Canada’s Companies’ Creditors Arrangement Act (CCAA). But despite telling a story that is essentially Canadian, the book is relevant to insolvency scholars and practitioners in different jurisdictions. It will make the reader think about how their own jurisdiction’s journey compares. In this review, I make some comparative observations regarding insolvency reform in India, and provide reflections on what the book might offer to our current insolvency reform efforts. The comparison with India is useful as a counter-point to the Canadian experience outlined in this book, at least inasmuch as judicial activism in corporate insolvency is concerned.
An overview of the book
After a discussion of the theoretical lenses used in the book in Chapter 1 (historical institutionalism and the recursivity of law), Part I of the book, consisting of chapters 2–5, takes us on a journey from the 1920s to the 1950s. Chapter 2 provides an overview of reorganizations in Canada before the enactment of the CCAA along with some discussion of English law origins. Helpfully, the chapter distinguishes between a creditor-centric and a debtor-centric view of reorganization and clarifies that the CCAA was initially used as a creditors’ remedy. The chapter also discusses the contextual factors that lead to the CCAA’s enactment. Chapter 3 discusses the introduction of the CCAA and reiterates that the statute was not meant to be a public interest remedy, i.e. a remedy for stakeholders like employees, but rather one that benefitted large creditors. Chapter 4 discusses constitutional issues surrounding the CCAA. Readers who are not Canadian will find this chapter informative from a constitutional law perspective as well. Chapter 5 tells us about attempts to repeal the statute from 1938 to 1953 on the grounds that it was being abused and that the context for which it was enacted no longer existed. One complaint against the use of the CCAA during this period seems to have been that it was used as a debtor-in-possession (DIP) remedy rather than the creditor remedy that it was intended to be [82]. This becomes particularly interesting as we read about developments in the 1980s and 1990s in later chapters of the book.
Part II of the book sets out to discuss the CCAA’s journey from the 1970s to the 2000s. Chapter 6 takes us from the 1950s to the early 1980s and discusses various legal developments and also changes in attitudes towards creditors’ remedies and reorganization. The legal changes during this time included the introduction of the Personal Property Security Acts by the provinces which, along with other developments, made the use of trust deeds to secure corporate loans less popular. This was a problem because the trust deed was necessary to access the CCAA [89]. The recessions of the 1980s and 1990s brought to light these and other problems with existing corporate restructuring mechanisms [103].
Chapter 7 describes how judicial interpretation of the CCAA in the 1980s and 1990s was instrumental in taking what was mainly a creditor remedy and converting it into a DIP remedy. It notes that this sort of interpretation raises questions about the role of legislature and the judiciary [122-123]. Judicial reasoning during this time seemed to rely on public policy objectives which were not actually present in the statute. This ultimately translated into the goal of preserving “the greater good” through reorganization [121]. This meant that the interests of the debtor (and with it, various stakeholders like employees, the environment, and the wider communities) were extended rather than limited by the CCAA [121]. Thus, insolvency became associated with preserving jobs rather than unemployment. The chapter also notes here that concurrent developments in the U.S., i.e. the introduction of Chapter 11 to the US Bankruptcy Code and theoretical discussions on insolvency, might have influenced Canadian courts to some extent [125]. Interestingly, Torrie points out here that in focusing on “the greater good” or interests of less powerful stakeholders, the courts also ended up advancing the interests of debtor-management, large creditors, and shareholders [126].
Chapter 8 goes on to explain how courts gave effect to these policy objectives despite the CCAA not having had been crafted for such purposes. Since a trust deed was required to access the CCAA, courts began to approve “instant trust deeds” created for this sole purpose [129]. Eventually this requirement to have a trust deed was interpreted away. In its place, a monitor was required to exercise debtor oversight (which was previously achieved by means of the trust deed) [138]. While this sort of innovation through the exercise of judicial discretion might seem laudable (and as Torrie notes, it was indeed praised by commentators), it also compromised predictability and the rule of law [141]. From here, as Chapter 9 tells us, Parliament began to endorse ad-hoc development of the CCAA by providing plan funding in a number of cases [149] and by codifying some of the judicial innovations [156]. This codification, along with the fact that Parliament did not simply repeal the CCAA, created a “positive feedback loop” for further judicial innovation. Torrie notes that such changes to the CCAA could be responsive to evolving commercial realities like corporate financing practices [159]. This chapter also provides a fascinating account of Supreme Court judges getting the newest ideas from academia into their judgements, through their law clerks [151]. These ideas, in turn, seeped into the judgements of lower courts [152].
The concluding point in the book is about how secured creditors have remained the prime players of corporate reorganization under the CCAA throughout the history of the statute. This is an important consideration, especially in light of the “public interest” arguments embraced by the courts during the 1980s and 1990s. On this aspect, the reader is left to wonder whether the courts were intentionally using the “public interest” gloss while seeking to protect secured creditors or whether the focus on vulnerable stakeholders naturally also lead to protection of secured creditors’ rights. The book’s concluding chapter also looks briefly to the future and suggests that the judicial activism might continue even in the face of a much-amended CCAA.
Relevance to insolvency law history in India
There is a clear resonance, particularly in Chapters 7 and 8, with how courts in India interpreted the Sick Industrial Companies Act, 1985 (SICA), which has now been repealed. Professor Kristin van Zwieten, studied the influence of the courts on SICA over time and found that Indian judges, like their Canadian counterparts, seemed to be influenced by the narrative of safeguarding vulnerable stakeholders like employees. The Indian courts were drawing from one of the stated purposes of the SICA, which was to facilitate rescue and rehabilitation of industrial companies.
Van Zwieten’s study finds three judicial innovations with regard to interpreting the SICA. The first was allowing companies to explore rehabilitation after the company had been found to be insolvent by the relevant tribunal; this lead to the second innovation: the erosion of the tribunal’s liquidation power. The third innovation relates to the moratorium on proceedings against the company. On the one hand it was interpreted to extend to the out-of-court right of a secured creditor to take over the company and sell assets over which it held security, while on the other hand, environmental compensation for tort victims and pre-commencement debts owed to workers were allowed to escape the moratorium.
The effect of these innovations was to slow down the process under SICA to a great extent. Unlike in Canada, the judicial innovations in India worked to undermine the statute rather than revitalise it. The difference in approaches could be a result of the Canadian judges being influenced by new academic ideas (as Torrie has observed) while Indian judges might have been resisting the liberalisation of the economy which the government had initiated in the early 1990s (as van Zwieten suggested in her article). These external influences on judicial decision-making in the insolvency context are important and mostly incidental. So, I would think that judicial restraint is preferable, despite Torrie’s book describing some innovations that worked well.
India has introduced new legislation, the Insolvency and Bankruptcy Code, 2016. Comparing the purpose and provisions of this new statute to that of the SICA, van Zwieten has commented that under the IBC, the creditors have discretion to decide on the route to be taken as against courts (or tribunals). Thus, this is less room for judicial discretion in that regard and it is overall, a good thing.
Relevance to the pandemic
Returning now to the relevance of the book for the post-Covid insolvency reform cycle, I want to make two points. The first is that over-reliance on the judiciary is not advisable. Canadian courts seem to have successfully used judicial innovations (sometimes even ignoring provisions of the statute) to provide practical solutions. Yet, such a system is not ideal for predictability and rule of law more generally, as Torrie observes in the book. In the present pandemic-induced crisis, with intermittent lockdowns affecting businesses, predictability in terms of what the law is and how it will be applied is very important. Relying on excessive judicial discretion will therefore not be the optimal path ahead. The second point is about the reliance on the public interest justification. The Indian experience with SICA shows that excessive activism by the judiciary in the public interest (to save jobs), even if well-intentioned, might make all stakeholders worse off.
THE HITCHHIKER'S GUIDE TO CORPORATE GOVERNANCE 