B. The Constitutional Dimensions of Insolvency Law

• Author: Roderick J. Wood
• Profession: Faculty of Law. University of Alberta
• Pages: 8-10

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The Parliament of Canada has the exclusive legislative authority to enact law in relation to bankruptcy and insolvency. Until the Great Depression of the 1930s, Canadian insolvency legislation was primarily concerned with proceedings under which an insolvency administrator liquidated the insolvent debtor’s assets and distributed the proceeds to creditors. Two statutes passed by Parliament in the wake of the Depression, the Companies’ Creditors Arrangement Act¹³ and the Farm Creditors Arrangement Act,¹⁴ adopted a fundamentally different approach in that they created insolvency proceedings where the objective was the negotiation of an arrangement under which the creditors compromised their claims and the debtor was permitted to carry on the business or farming operations. Both of these statutes were challenged, and in both cases the constitutional validity of the legislation was upheld.¹⁵ The Privy Council held that the power to enact laws in relation to bankruptcy and insolvency was not intended to be "stereotyped" so as to confine Parliament to the types of insolvency regimes then in existence. The

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element essential to constitutional validity is that the legislation must be directed towards debtors who are unable to meet their liabilities.

The attitude towards provincial attempts to establish insolvency regimes has evolved significantly over time. Following the wholesale repeal of Canadian insolvency legislation in 1880, provinces enacted voluntary assignment legislation to partially fill the gap. The legislation permitted a debtor to make an assignment of his or her property to a trustee who would liquidate it and distribute it among the creditors. The Privy Council held that this legislation was intra vires.¹⁶ It noted that the proceedings were not compulsory and that the legislation did not require that the debtor be insolvent. This led to the belief that provincial insolvency legislation might be valid in the absence of a similar federal insolvency regime. Subsequent cases have rendered this view doubtful.

In 1937 Alberta enacted the Debt Adjustment Act.¹⁷ This legislation prevented creditors from enforcing their remedies against a debtor without first obtaining a permit from the Debt Adjustment Board. The board also had the power to compel a creditor to accept a compromise or arrangement. Both the Supreme Court of Canada¹⁸ and the Privy Council¹⁹ held that the statute was ultra vires of the Alberta legislature. In...