A. The Winding-up and Restructuring Act

AuthorRoderick J. Wood
ProfessionFaculty of Law. University of Alberta
Pages533-542

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There are two specialized insolvency regimes that apply to particular types of debtors or economic sectors. The Winding-Up and Restructuring Act is used primarily in respect of insolvencies of banks, insurance companies, trust companies, and loan companies. It is sometimes used to wind-up federal corporations, such as the liquidation of the assets of the Christian Brothers of Ireland in Canada as a result of the claims of boys who suffered abuse at the Mount Cashel Orphanage in Newfoundland. There is also a special insolvency regime that governs railway companies.

Unfortunately, the use of specialized insolvency regimes in these sectors has produced a creeping statutory obsolescence.1While the general insolvency regimes are frequently amended in order to create an efficient and modernized insolvency system, these amendments are usually not introduced into the specialized insolvency regimes.2The

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differences between the general insolvency regimes and the specialized regimes grow progressively greater, and the specialized regimes fall into mounting disrepair. Indeed, the provisions relating to railway insolvencies seem more appropriately included in a museum of railway antiquities than in the statute books. One can only hope that Canadian railways will remain profitable3in the foreseeable future, since the current railway insolvency regime seems wholly inadequate for the task.

1) Historical Origins

The repeal of the Canadian insolvency statutes4in 1880 meant that there was no longer an expedient method available to liquidate insolvent companies. In 1882, at the behest of boards of trade of the larger cities, a new winding-up statute was enacted.5The new statutory regime that governed the liquidation of a company was modelled on the English system of company liquidation. It was vastly different from the federal bankruptcy regime that was subsequently enacted in 1919. Whereas the property of a bankrupt vests in the trustee in bankruptcy, the ownership of the assets of the insolvent company does not vest in the liquidator under the winding-up statute. Instead, the control and management of the company is taken from the directors and given to the liquidator.

Despite the enactment of this legislation, a bifurcated insolvency system - in which a bankruptcy statute governs personal insolvency of individuals and a separate liquidation statute governs corporate insolvencies - did not evolve in Canada. From its inception, the bankruptcy regime was available to both individuals and corporations. This meant that a choice had to be made as to which of the insolvency regimes would be employed in respect of the liquidation of an insolvent company. This was changed in 1966, when the bankruptcy legislation was amended to provide that bankruptcy proceedings took precedence over winding-up

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proceedings.6Thereafter, the winding-up statute was primarily used for the liquidation of insolvent financial institutions, including banks, trust companies, and insurance companies, since these cannot be liquidated under the BIA and cannot be restructured under the CCAA.7

2) Application of the Act

The Winding-Up and Restructuring Act (WURA) applies to the following entities:8· federal corporations;

· banks, trust companies, insurance companies, and loan companies; and

· trading companies, wherever incorporated, doing business in Canada.

The Act does not apply to railway companies,9since railway insolvencies are governed by their own insolvency regime. The Act also does not apply to a federal corporation incorporated under the Canada Business Corporations Act (CBCA), since that statute specifically provides for the non-application of the WURA.10The Act is not limited to insolvency proceedings but may be employed for the voluntary liquidation of solvent federal companies that cannot be liquidated under the CBCA.11

In respect of an authorized foreign bank, the winding-up proceedings apply only to the winding-up of its business in Canada and to the liquidation of its assets.12

3) Commencing Proceedings

Proceedings are commenced through an application to a court by way of a petition for a winding-up order. The proceedings must be brought

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before the superior court of the province where the company’s head office is situated or where its chief place or one of its chief places of business in Canada is situated.13A court may make a winding-up order where a company is insolvent.14If a winding-up order is sought on the grounds of insolvency, the application may be brought by the company, a creditor, or a shareholder.15A company is deemed to be insolvent upon the occurrence of certain specified events.16These are similar but not identical to the acts of bankruptcy, and include an inability to pay debts as they become due, an acknowledgment of insolvency, a disposition of property made with intent to defraud, defeat, or delay its creditors, and a seizure of its property under execution that is permitted to remain unsatisfied until within four days of the sale or for fifteen days after the seizure. A company is also deemed to be insolvent if a creditor to whom more than $200 is owed has served the company with a written demand for payment and the company neglects to pay it for sixty days after the service of the demand.17

4) Stay of Proceedings

An automatic stay of proceedings comes into operation as soon as a court makes a winding-up order.18No suit, action, or other proceeding may be proceeded with or commenced against the company without leave of the court. A court, on application, may also order a stay of proceedings after the proceedings are commenced but before a winding-up order is granted on such terms as the court thinks fit.19As the purpose of the stay of proceedings in winding-up proceedings is the same as that in bankruptcy proceedings, a similar approach is to be taken in determining the scope of the stay and the reasons that might convince a court to lift it.20Unlike bankruptcy proceedings, winding-up proceed-

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ings do not bind the Crown.21The stay of proceedings in winding-up proceedings therefore does not bind the Crown.

5) Effect of a Winding-Up Order

A winding-up order does not cause the assets of the insolvent company to vest in the liquidator.22Instead, the Act provides that the company shall cease to carry on business except as required for the beneficial winding-up of the company.23The winding-up is deemed to commence at the time of the service of the notice of presentation of the petition for winding up.24The effect of this deeming provision is uncertain. It resembles the relation-back doctrine that was at one time employed in bankruptcy law. Under this doctrine, a bankruptcy was deemed to have occurred at the date of the application for a bankruptcy order. The doctrine produced difficulties in that it had the effect of invalidating transactions that were entered into by the debtor after the application was brought but before the order was granted. It is not clear if the doctrine has a similar effect in winding-up proceedings. A court might conclude that the company lacks the capacity to enter into post-petition transactions, since it is permitted to carry on business only under the control of the liquidator. However, the WURA goes on to provide that all the powers of the directors of the company cease upon the appointment of a liquidator.25This supports the view that it is the actual appointment of the liquidator and not the winding-up order or its deemed retrospective effect that results in the loss of the directors’ managerial power. On this view, transactions entered into by the company before the appointment of a liquidator are valid and effective.

The Act provides that every attachment, sequestration, distress, or execution put in force against the estate or effects of a company after the making of a winding-up order is void.26The wording is different from that contained in the bankruptcy statute, and its meaning is ambiguous. The provision refers to an execution or other process that is "put in force" after the winding-up order. It might be argued that a process that is put into place prior to the winding-up order is preserved. However, this interpretation would undermine a fundamental objective of insol-

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vency law in that it would not result in a single insolvency proceeding in which the assets of the debtor are liquidated on behalf of all the creditors. It is therefore likely that the provision was intended to invalidate all enforcement proceedings following the winding-up order unless they have been fully executed by payment of the money to the creditor.27

6) Powers and Duties of the Liquidator

On making a winding-up order, the court may appoint one or more liquidators.28The liquidator must be a licensed trustee.29Unless a court orders otherwise, the creditors and shareholders of a corporation must be notified of the proposed appointment.30A court may appoint a provisional liquidator after the bringing of a petition for a winding-up order but before it is granted.31The court also has the power to remove a liquidator if due cause is shown.32A liquidator is required to take custody and control of the company’s assets and perform all duties imposed by the court.33Within 120 days of the appointment, the liquidator must prepare a statement of the assets, debts, and liabilities of the company.34The liquidator carries out the liquidation under the supervision of the court, and the court may authorize the liquidator to...

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