The treatment of ipso facto clauses in Canada.

Author:Ho, Adrienne
Position::Abstract through III. The Treatment of Ipso Facto Clauses in Canada A. Introduction, p. 139-164
 
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Whether a debtor is an individual or a sophisticated financial institution, a common issue that arises is whether its insolvency alters the rights of the parties with whom the debtor has entered into contracts. Could the non-defaulting party to the contract, on the basis of the debtor's insolvency, terminate or amend the contract? Could it demand accelerated payment? Many parties preserve contractual rights, through what are commonly known as ipso facto clauses, to terminate and amend contracts or to demand an accelerated payment in the event that a counterparty to the contract becomes insolvent. Despite recent amendments to the Bankruptcy and Insolvency Act (.BIA) and the Companies' Creditors Arrangement Act (CCAA), the validity of ipso facto clauses, outside the context of derivatives contracts, is an issue that has not been thoroughly addressed in the Canadian literature. This article will trace the antideprivation rule in England, culminating in the United Kingdom Supreme Court's leading case: Belmont Park Investments PTY Ltd. v. BNY Corporate Trustee Services Ltd. and Lehman Brothers Special Financing Inc. It will then explore to what extent recent amendments to the BIA and the CCAA have displaced the common law rule in Canada. Both the BIA and the CCA4 have nullified ipso facto clauses in some but not all situations, the most notable exceptions being cases involving corporate bankruptcies and receiverships. This article will conclude with a discussion of the codified exceptions to the common law principles and whether the Canadian jurisprudence might incorporate some of the modifications to the antideprivation rule introduced by Lord Collins in Belmont.

Lorsqu'un debiteur devient insolvable, qu'il s'agisse d'un individu ou d'une institution financiere complexe, la question se pose a savoir si son insolvabilite affecte les droits des parties avec lesquelles le debiteur a conclu un contrat. La partie non-defaillante pourrait-elle ainsi mettre fin ou modifier le contrat sur la base de l'insolvabilite du debiteur? Pourrait-elle demander un paiement accelere? Il est commun que les parties maintiennent leurs droits contractuels a travers des clauses ipso facto, leur permettant de modifier, de mettre fin aux contrats ou de demander un paiement accelere lorsqu'une autre partie au contrat devient insolvable. Malgre de recentes modifications a la Loi sur la faillite et l'insolvabilite (LFI) et a la Loi sur les arrangements avec les creanciers des compagnies (LACC), la validite des clauses ipso facto, en dehors du contexte des contrats derivatifs, est un probleme qui n'a pas encore ete adresse en profondeur par la doctrine canadienne. Cet article retracera le parcours du principe legal de non-appauvrissement en Angleterre, ayant abouti a la Cour supreme du Royaume-Uni dans l'arret Belmont Park Investments PTY Ltd. v. BNY Corporate Trustee Services Ltd. and Lehman Brothers Special Financing Inc., avant d'examiner dans quelle mesure les modifications recentes a la LFI et a la LACC ont supplante la regle de common law au Canada a ce sujet. La LFI et la LACC ont toutes deux invalide les clauses ipso facto dans plusieurs situations, exceptes pour les cas de faillite d'entreprise et de mise sous sequestre. Cet article analysera finalement les exceptions codifiees aux principes de common law et l'integration potentielle a la jurisprudence canadienne de certaines modifications de la regle du nonappauvrissement introduites par Lord Collins dans l'arret Belmont.

Introduction I. Overview of Insolvency Law Regimes A. England B. Canada C. The Effect of Bankruptcy and Insolvency Proceedings on the Debtor's Conducts II. The Anti-Deprivation Rule in England A. Introduction B. The Pari Passu Principle C. Statutory Anti-Avoidance Provisions D. Early Applications of the Anti-Deprivation Rule E. Where the Anti-Deprivation Rule Has Not Been Applied 1. Limited and Absolute Interests 2. Deprivation Took Place for Reasons Other than Bankruptcy 3. Good Faith and die Parties' Intentions III. The Treatment of Ipso Facto Clauses in Canada A. Introduction B. The Anti-Deprivation Rule in Canadian Jurisprudence C. A Codification of the Anti-Deprivation Rule? 1. The Application of the Statutory Provisions and die Anti-Deprivation Rule 2. The Affected Parties 3. Timing Requirements 4. Deprivation Took Place for Reasons Other than Bankruptcy 5. Limited Protection for Flawed Assets 6. Distinctions Between Consumers, Insolvent Persons, and Eligible Financial Contracts D. Where the Statutory Provisions and the Anti-Deprivation Rule May Not Apply 1. Statutory Exceptions to die General Prohibition in die BIA and the CCA A 2. Good Faith and the Canadian Anti-Deprivation Rule Conclusion Introduction

Whether a debtor is an individual or a sophisticated financial institution, a common issue that arises is whether its insolvency alters the rights of the parties with whom the debtor has entered into contracts. Several questions arise. Could the non-defaulting party to the contract, on the basis of the debtor's insolvency, terminate or amend the contract? Could there be a demand for accelerated payment? Many parties preserve contractual rights, through what are commonly known as ipso facto clauses, to terminate and amend contracts or to demand an accelerated payment in the event that a counterparty to the contract becomes insolvent. Despite recent amendments to the Bankruptcy and Insolvency Act (1) and the Companies' Creditors Arrangement Act, (2) the validity of ipso facto clauses, outside the context of derivatives contracts, (3) is an issue that has only received limited attention in the Canadian literature.

This article will focus on the treatment of contracts in cases involving individual and corporate bankruptcies as well as proceedings under the BIA and the CCAA. Unlike both England and the United States, Canadian insolvency law is unique because both common law principles and statutory provisions could apply, depending on the nature of the debtor involved and the particular facts of each case. Whereas the common law principle, known as the "anti-deprivation rule" or "fraud upon the bankruptcy law rule," is over two hundred years old, statutory developments in this area have only materialized significantly in Canada over the last two decades. Thus, this article will explore to what extent these statutory developments have codified or displaced common law principles. The BIA and the CCAA have provided some welcomed clarity that ipso facto clauses are generally void in cases involving Division I proposals, consumer proposals, proceedings under the CCAA, and individual bankruptcies. The status of such clauses with respect to corporate bankrupts and receiverships is less clear, but recent jurisprudence suggests that the common law anti-deprivation rule is still very much a facet of Canadian law.

This article has been divided into three main parts. Part I begins with a brief overview of the insolvency regimes in both England and Canada. It then provides a foundation as to why the issue of the treatment of a debt- or's contract in the event of its insolvency is important. Part II will trace the development of the anti-deprivation rule in England, and it will conclude with a categorization of cases where the rule has been found not to apply, with a particular focus on the changes to the scope of the rule as a result of the United Kingdom Supreme Court's decision in Belmont Park Investments PTY Ltd. v. BNY Corporate Trustee Services Ltd. and Lehman Brothers Special Financing Inc. (4)

This article will then move on to the Canadian context in Part III and start with an overview of the anti-deprivation rule in Canadian jurisprudence. Then, using the concepts explored in Part II as a framework for discussion, this article will explore to what extent the recent amendments to the BIA and the CCAA have displaced the common law in Canada. Both the BIA and the CCAA have nullified ipso facto clauses in some but not all situations, the most notable exceptions being cases involving corporate bankruptcies and receiverships. Part III will discuss the codified exceptions to the statutory principles and explore the issue of whether the Canadian jurisprudence might incorporate some of the modifications to the anti-deprivation rule introduced by Lord Collins in his seminal decision in Belmont, before concluding.

  1. Overview of Insolvency Law Regimes

    1. England

      I begin by briefly elucidating the various types of insolvency regimes available. In England, individuals, companies, and partnerships are largely governed by the Insolvency Act 1986. (5) Insolvent individuals can be subject to debt relief orders, (6) voluntary arrangements, or bankruptcy orders. Under an individual voluntary arrangement (IVA), creditors can agree to a debtor's proposal in satisfaction of his or her debts; the process is supervised by a nominee. (7) Alternatively, the individual or other parties, including creditors, (8) can petition the individual debtor into bankruptcy provided that certain prerequisites are satisfied. (9) In the case of such a bankruptcy order, all of the property belonging to the debtor at the commencement of the bankruptcy is vested in a trustee. (10) The trustee then liquidates the assets and distributes them in accordance with various statutory rules. (11)

      As for companies, there are a few possible outcomes. Upon the application of a petition to a court, a company can be wound up. (12) As in cases involving personal bankruptcies, the liquidator obtains control of the company's assets and then realizes and disposes of them in accordance with the statutory scheme. (13) Alternatively, with company voluntary arrangements (CVAs), (14) administrations, (15) and reorganizations, (16) a company attempts to come to an arrangement with its creditors with the objective to survive as a going concern. (17) If these efforts fail, however, the company will be dissolved and wound up. (18) Finally, debenture...

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